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ECB slashes interest rate to 0.15% ECB cuts interest rate to 0.15%
(35 minutes later)
The European Central Bank (ECB) has lowered its benchmark interest rate to 0.15% from 0.25% in an effort to stimulate economic growth and avoid deflation in the eurozone.The European Central Bank (ECB) has lowered its benchmark interest rate to 0.15% from 0.25% in an effort to stimulate economic growth and avoid deflation in the eurozone.
It has also reduced its deposit rate below zero, to -0.1%, which means commercial banks will have to pay to lodge their money with the central bank, rather than receive interest.It has also reduced its deposit rate below zero, to -0.1%, which means commercial banks will have to pay to lodge their money with the central bank, rather than receive interest.
The idea is to incentivise the banks to lend to businesses, thereby stimulating growth.The idea is to incentivise the banks to lend to businesses, thereby stimulating growth.
The ECB is the first of the "Big Four" central banks (the ECB, The US Federal Reserve, The Bank of Japan and the Bank of England) to do this. The ECB is the first of the "Big Four" central banks (the ECB, the US Federal Reserve, the Bank of Japan and the Bank of England) to do this.
The BBC's economics correspondent, Andrew Walker, said: "The consequences are unpredictable - how will banks respond to this very unusual move? That the ECB chose to do this in the face of that uncertainty is a very telling indication of its concerns about the weakness of Eurozone recovery and the danger of deflation."The BBC's economics correspondent, Andrew Walker, said: "The consequences are unpredictable - how will banks respond to this very unusual move? That the ECB chose to do this in the face of that uncertainty is a very telling indication of its concerns about the weakness of Eurozone recovery and the danger of deflation."
Deflation fearsDeflation fears
Although the danger of deflation in the eurzone is limited, the ECB is concerned that growth is very sluggish and bank lending weak - both of which could potentially derail the fragile economic recovery. Although the danger of deflation in the eurozone is limited, the ECB is concerned that growth is very sluggish and bank lending weak - both of which could potentially derail the fragile economic recovery.
The eurozone economy is only growing at 0.2%. Consumer spending, investment and exports are all growing at a slower pace than this time last year.The eurozone economy is only growing at 0.2%. Consumer spending, investment and exports are all growing at a slower pace than this time last year.
Inflation in the Eurozone fell to 0.5% in May, down from 0.7% in April. This is well below the European Central Bank's 2% target.Inflation in the Eurozone fell to 0.5% in May, down from 0.7% in April. This is well below the European Central Bank's 2% target.
UnemploymentUnemployment
If the eurozone slips into deflation, consumers would spend even less because they'd expect prices to fall in future months. For the same reason investors stop investing.If the eurozone slips into deflation, consumers would spend even less because they'd expect prices to fall in future months. For the same reason investors stop investing.
Growth would then grind to a halt and demand would be severely constrained. The large debts amassed by the eurozone's countries, companies and banks would take longer and be harder to pay off.Growth would then grind to a halt and demand would be severely constrained. The large debts amassed by the eurozone's countries, companies and banks would take longer and be harder to pay off.
Unemployment, which is already at nearly 12% in the eurozone, and much higher in places like Spain, Portugal and Greece, would get even worse.Unemployment, which is already at nearly 12% in the eurozone, and much higher in places like Spain, Portugal and Greece, would get even worse.
It's a picture that prompted today's moves by Mario Darghi and the 23 other members of the governing council at the European Central Bank. It's a picture that prompted today's moves by Mario Draghi and the 23 other members of the governing council at the European Central Bank.