ECB Cut and Statement

The European Central Bank (ECB) cut its main interest rate today by 0.5% to 2.0%.  The accompanying statement included this commentary:

Since September 2008 the financial market turmoil has intensified and broadened. Tensions have increasingly spilled over from the financial sector into the real economy. As a result, economic activity throughout the world, including in the euro area, has weakened further.

Looking further ahead, on the basis of our current analysis and assessment, we continue to see global economic weakness and very sluggish domestic demand persisting in the coming quarters as the impact of the financial tensions on activity continues.

In the view of the Governing Council, this outlook for the economy remains surrounded by an exceptionally high degree of uncertainty. Overall, risks to economic growth remain clearly on the downside. They relate mainly to the potential for a stronger impact on the real economy of the turmoil in financial markets, as well as to concerns about the emergence and intensification of protectionist pressures and to possible adverse developments in the world economy stemming from a disorderly correction of global imbalances. (Emphasis added.)

As recently stated, emerging themes to look for have to do with the rise of protectionism and increased geopolitical risk.  Countries can become bad neighbors when governments become stressed from domestic problems.

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