The European Central Bank has slashed interest rates to record low. The bank slashed the interest rates in order to breathe life into the deteriorating euro zone economy and the backup measures agreed by the government leaders last week to tackle the bloc’s debt crisis.
The quarter-point cut in the ECB’s main refinancing rate to 0.75% or 25 basis points was in line with market expectations and followed a dire batch of the economic data that show even euro zone powerhouse Germany in entering a modest downturn.
The European shares extended gains on news and the euro fell. Nomura economist Jens Sondenrgaard said, who had forecast a cut to 0.50% in the main rate said, “This outcome is probably one that is most acceptable to the ECB at this stage.”
ECB President Mario Draghi will explain the Governing Council’s decision at 1230 GMT news conference.
The ECB’s loosening of policy followed shortly after China and Britain did similar. Besides, cutting the main refinancing rate, the ECB also reduced its deposit rate, which acts as a floor for the money market to zero from 0.25%.
This move can encourage banks to lend to each other rather than simply park the funds of up to 800 billion euros back at the ECB every night.
The cut will be welcomed by the southern European banks that have tapped the ECB heavily for loans.
The 25 basis point cut will decrease the annual interest payments from 1 trillion euros in 3 years loans by about 2.5 billion euros.
There is a slim chance that ECB will offer a repeat of the twin 3 year ultra cheap loans with which it funneled over 1 trillion euros to banks in December and February. However, the ECB is not likely to announce any further non-standard measures-bond purchases or ultra-long loans after already loosening its lending rules on June 22. It will want to see the impact of the step before tweaking the framework.
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU member states. This bank was established by the Treaty of Amsterdam in 1998 and is based in Frankfurt, Germany. The current President of the ECB is Mario Draghi, the former governer of the Bank of Italy.