ECB Acts To Halt Euro Deflation Threat

The European Central Bank (ECB) has lowered its benchmark interest rate to a new record low and is to charge banks to deposit cash with it for the first time, to help boost growth.

The bank’s governing council said the measures were the first in a series of monetary policy announcements to be made today amid efforts to get the eurozone economy moving and prevent crippling deflation, with inflation recently falling to 0.5% – well below the ECB’s 2% target.

In a move aimed at stoking bank lending, the ECBsaid it was cutting its deposit rate to a negative figure of -0.1%.

This would mean that lenders wanting to park cash with the ECB would be charged interest to do so.

The separate refinancing rate – effectively the ECB’s base rate of interest used to calculate borrowing rates – was cut from 0.25% to 0.15%.

More details were expected to be revealed at an ECB news conference in the next hour.

Economists say the biggest threat to economic recovery in the debt-ladeneuro area is from banks failing to lend and costs falling.

Tackling the spectre of deflation – or falling prices – is part of the ECB’s key mandate.

Deflation is seen as such a threat because it has been proved to stop people or firms from making spending decisions because of the hope prices will be cheaper at a later date – a spiral which has persistently dogged Japan.

There was a positive reaction to the developments on world markets – (see the latest moves here) – with stocks rising across Europe.

The German DAXhit 10,000 points for the first time while on the bond markets, government borrowing costs also fell.

The euro – widely seen as overvalued given the nature of Europe’s economic problems – fell to a four-month low against the dollar.

More follows…

5 June 2014 | 12:51 pm – Source: orange.co.uk
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