Hard talk, soft policy

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: The global economy has stopped sinking and central bankers are pausing for breath. As The Economist went to press on July 2nd, the European Central Bank (ECB) was expected to keep its main “refi” interest rate unchanged, at 1%. The ECB’s rate-setting council has been chary of cutting rates closer to zero as policymakers elsewhere have done. Its reluctance to do more has attracted criticism, only some of it fair.

The focus on policy rates may put the ECB in a bad light but these are no longer a reliable guide to the overall monetary-policy stance. If you look at market rates the policy stance in the euro area is as loose as anywhere else, because of stimulus decisions taken at the height of the financial crisis. In October the ECB decided it would offer banks as much cash as they wanted, at a fixed interest rate (the refi rate) and against a wider range of security than usual, for up to six months. It also scheduled extra three-month and six-month refinancing operations, so that banks could come more often to the central-bank well.

In May the ECB council agreed to extend the offer of fixed-rate cash to one year. At the first 12-month refinancing operation on June 24th, euro-zone banks borrowed a staggering €442 billion ($620 billion). With so much cash splashing around, the charge that banks make for overnight loans has stayed well below the refi rate, with some occasional spikes (see chart). Since the €442 billion cash injection, overnight interest rates in the euro zone have fallen to a record low of 0.3%, below those in Britain and scarcely higher than in America. Indeed banks can now borrow more cheaply in euros than in pounds for either three, six or 12 months.