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The Eurozone interest rates remain low on account of the European Central Bank holding market grips by setting policy rates or by buying assets on financial markets. However, the market steers not only on the ECB’s movements but depends, as well, on the inflation dynamics and the equilibrium interest rate, which is consistent with stable inflation.
When inflation is too low (high), the central bank steers market rates below (above) the equilibrium level which is ultimately the main determinant of the level of interest rates. The latter is defined by the real return generated by the balance of saving and investment in the economy.
The Eurozone is currently characterized by excess savings, as illustrated by its current account surplus of more than 3 percent of GDP. This situation results from structural factors such as ageing populations, cuts in public investments or poor productivity gains that are out of a central bank’s reach, BNP Paribas reported.
