ECB cuts rates to new low

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ECB cuts rates to new low

ECB cuts rates to new low
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As expected the European Central Bank has cut borrowing costs to a new record low.

The benchmark interest rate has been reduced from 1.0 percent to 0.75 percent.

European shares extended gains on the news and the euro fell in value against other currencies.

Economists said the move was intended to send a signal that the ECB is doing something to help turn around the weakening eurozone economy.

It is a complement to measures agreed by government leaders last week to tackle the bloc’s debt crisis.

“It’s not so much about the real effect that (a rate cut) will have,” said Nordea analyst Aurelija Augulyte. “It’s more a psychological game, a game of trying to be supportive of sentiment.”

In addition to cutting the main refinancing rate, the ECB also reduced its deposit rate to zero from 0.25 percent.

Thart could encourage banks to lend to each other rather than simply parking funds of up to 800 billion euros back at the ECB every night.

The central bank is under pressure from the financial markets and even the International Monetary Fund to take bolder measures, with IMF Managing Director Christine Lagarde urging the bank to resume its purchases of government bonds of distressed eurozone countries, which is an unlikely scenario.

A core of ECB policymakers feel the bank’s bond buying programme – which has been dormant for four months – amounts to monetary financing of governments, which is beyond the ECB mandate.

While inflation remains above the ECB’s target of just below 2.0 percent, it has been sliding recently and ECB staff expect it to average 1.6 percent next year, giving room for a rate cut.

Business surveys released on Wednesday strengthened the case for a cut, showing the eurozone’s private sector downturn eased only slightly in June and that it remains in recessionary territory.

UK central bank to print more money to boost UK economy

The Bank of England launched a third round of monetary stimulus on Thursday, announcing it
would restart its printing presses and buy 50 billion pounds of asset purchases with newly created money to help the economy out of recession.

The move was widely expected after BoE Governor Mervyn King said last month the economic outlook had deteriorated since the BoE called a halt to its second round of asset purchases – also known as quantitative easing – in May.