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| Version 1 | Version 2 |
|---|---|
| ECB cuts interest rate to 0.15% | ECB cuts interest rate to 0.15% |
| (about 1 hour 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. |
| Howard Archer, chief UK and European economist at IHS Global Insight said: "Despite being widely anticipated and in some quarters criticised for occurring too late, it is still a bold and unusual move by the ECB to take its deposit rate into negative territory." | |
| "There has to be considerable uncertainty as to how effective negative deposit rates will turn out to be," he added. | |
| It has been tried before in smaller economies. Sweden and Denmark, who are both outside the Single Currency, attempted to use negative rates in recent years with mixed results. | |
| Analysts said in Sweden it had little discernable impact; in Denmark it did have the effect of lowering the value of the currency, the Krone, but according to the Danish Banking Association it also hit the banks' bottom line profits. | |
| Unconventional measures | |
| The ECB's president, Mario Draghi, also announced other measures. | |
| Long term loans are to be offered to commercial banks at cheap rates until 2018. These loans would be capped at 7% of the amount that the individual banks in question lends to companies. Thus, the more the banks lend to companies, the more money they can borrow cheaply from the ECB. | |
| It's also doing preliminary work that would lead to buying bundles of loans that are made to small businesses in the form of bonds. This is being seen as a step towards providing companies with credit through the financial markets. | |
| Mr Draghi said the ECB's policymakers unanimously agreed to consider more unconventional measures to boost inflation if it stays too low. He insisted that more would be done, if necessary. | |
| "Are we finished? The answer is no. We are not finished yet," he said. | |
| Shares jump, euro falls | |
| Even though some of the measures, like the more to negative rates on deposits, were expected European shares moved higher on the ECB announcements. | |
| The benchmark German DAX 30 index jumped about the 10,000 level for the first time. The CAC 40 in Paris gained 0.77% shortly after the ECB's comments. | |
| Meanwhile, the euro plunged to $1.3558, its lowest level in four months. | |
| Deflation fears | Deflation fears |
| 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. | 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. |
| Unemployment | Unemployment |
| 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 Draghi 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. |