Where could ECB interest rates go?

A quasi announcement

Economics is mostly quantitative, being dominated by mathematics in its theoretical framework and by econometrics in its empirical one. Central banking seems instead to be dominated by a literary approach. In July 2012 the “Whatever” utterances by Draghi contributed to change the path of the € crisis. In the last press conference, his statement about the Governing Council being “comfortable” in acting at the subsequent policy meeting sent a clear message that the ECB convinced itself, not too early in the view of about everybody else, that something had to be done to counter the gradual dis-anchoring of inflationary expectations [1]. 

Is the ECB really so generous?

A simplified, to the point of being simplistic, approach to understanding the transmission of monetary policy to the real economy consists of three basic links:

1. The central bank fixes, or at least strongly influences, the marginal cost of bank funding through its interest rates;
2. Banks equalise the expected marginal cost of their own funding to the marginal revenue from lending;
3. Firms, households and the external sector, in the latter case through the exchange rate, increase or decrease aggregate demand, and ultimately prices, in line with the cost of bank lending.