The European Central Bank was correct to reduce interest rates. It is a prudent measure, at a time when the US slowdown threatens to precipitate a serious downturn in the international economy. Taken together with recent reductions in US interest rates and another cut in British interest rates, falling borrowing costs in the euro zone will go some way to supporting growth. The difficulty for the ECB, however, is that its recent public statements make yesterday's cut look like a U-turn in its policy approach. Put simply, the bank does not appear to be pursuing a consistent and well-communicated policy approach.
Recent public statements from senior ECB officials have suggested that lower interest rates were not in prospect, mainly because the inflation rate remained too high. So what has changed? There are two possible explanations. One is that the ECB has become more concerned about an economic slowdown - and thus less concerned about inflation. The other is that it has bowed to pressure to lower interest rates from the US and from bodies such as the International Monetary Fund and the Organisation for Economic Co-Operation and Development.
Both factors may have played a part in yesterday's decision. Mr Wim Duisenberg, the ECB president, referred to "somewhat lower" inflationary pressures, in a press conference following the announcement. But figures indicating a sharp slowdown in German manufacturing industry may have been more influential. Taken in the context of the recent statements from its senior officials, however, the cut raises serious questions about the manner in which the ECB decides policy and communicates to the financial markets. If the bank had prepared the way for the rate reduction with appropriate comments in recent weeks from senior officials or board members, it would have received a warmer response and given the impression of a well thought-out strategy.
As it is, the ECB has left itself open to accusations that it bowed to pressure from the US, or that it has been panicked by contradictory economic signals. Its credibility with the markets has been further weakened. That said, it bears repeating that the decision to cut interest rates was the correct one. There is great uncertainty about the outlook for growth in the US and internationally and the EU cannot remain immune. A modest reduction in interest rates is thus appropriate for the euro zone as a whole.
For the Irish economy the benefits are more debatable, as inflation here is well above the euro zone average. However as growth here eases back it is important for us that the euro zone remains healthy, while a quarter point rate cut should not be large enough to provide too much of a spur to the housing market, or to general inflationary pressures.