Rate cut and lending incentives unlikely to be enough

A small cut in the ECB’s main refinancing rate seems like a done deal this month and is likely to be accompanied by a reduction in the deposit rate to below zero. The Bank also seems set to offer more long-term loans to the banking sector on the condition that they lend the money on to firms. But neither policy would drastically alter the economic outlook or reduce the risk of deflation. The interest rate cuts could have negative side effects and have probably already been priced into financial markets. Meanwhile, even assuming that banks take up extra funds, they might struggle to find firms that are keen to borrow.