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ECB rate move hands Coalition perfect election springboard

The European Central Bank (ECB) may have just handed the Government the perfect springboard into a general election.
Frankfurt’s decision to cut rates by another quarter point comes just weeks ahead of what is expected to be another giveaway budget with a substantial tax package. Throw in an unexpected €14 billion from Apple and you have got, from the Government’s perspective, a voter-friendly cocktail of forces.
The Government has probably already decided on the date of the election – the speculation is for some time in November.
Ministers want to try to frame the election around the economy, and having a positive move on mortgage rates as well as a generous budget offering fresh in the minds of voters will help.
[ ECB rate cut: What does it mean for Irish mortgage holders and how much will they save?Opens in new window ]
Backbenchers are also said to be keen to avoid an election in January and February – the Government officially has until March next year to hold the vote – when post-Christmas bills arrive and winter energy costs bite. Consumer sentiment also tends to be lower at the start of the year.
Naturally, Government spokespeople are tight-lipped about the election date but parties are said to be preparing in the background with posters already ordered and manifestos nearing completion.
What the ECB’s latest move on rates says about the state of the euro zone economy is more difficult to assess. Inflation is coming down gradually with some caveats about price growth in the services sector driven by wage growth, a narrative that has been repeated for months.
There is a perceptible shift in emphasis, however, from inflation to the stuttering performance of the euro zone economy with growth in the second quarter recently revised down on the back of a worrying contraction in Germany, Europe’s powerhouse economy.
The ECB said financing conditions in the euro area remain restrictive with economic activity “still subdued, reflecting weak private consumption and investment”. It projects the euro area economy will grow by a meagre 0.8 per cent this year.
Dovish policymakers, who highlight the recessionary risks attached to high interest rates, are pushing for a faster peeling back of the rates onion while hawkish ones, who are still in the majority, remain unnerved by stubbornly high price pressures in the services sector.
While markets are pricing in at least one more rate cut this year and possibly four more next year, the path for rates, like the economic outlook, is unclear.
In the post-meeting press conference, ECB president Christine Lagarde repeated her mantra that future “interest rate decisions will be guided by the inflation outlook, incoming data and the transmission strength of our monetary policy”, which tells us very little.
She did, however, warn that inflation was expected to rise again in the latter part of this year, partly because previous sharp falls in energy prices will drop out of the annual rates.

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