On Thursday, the European Central Bank (ECB) took two significant measures to shore up the flagging euro zone economy.
(1) A reduction in its key interest rate from 1 percent to 0.75, a record low for the euro zone.
(2) A reduction in its deposit rate, from 0.25 percent to zero.
The second measure was taken to stimulate lending between banks. Currently inflation in the euro zone is above the 2 percent target and putting the interest rate below inflation is a move intended to promote investment over saving.
Both measures are meant to stimulate the economic situation, after reports from earlier in the week said that the euro zone’s service sector shrinking and business confidence in decline.
The euro zone will likely have “little or no growth” in this year’s second quarter. But ECB president Mario Draghi said that it “should recover somewhat” by the end of the year.
He also noted that inflation was not among the risks facing the euro zone and things were “definitely not” as bad as in 2008.
China’s central bank and the Bank of England also announced stimulus measures (at the same moment, somehow) on Thursday. China is cutting deposit and lending rates and the Bank of England announced it is allowing £50 billion of extra quantitative easing.
Measures Fail To Restore Confidence
The measures showed that the ECB “is not stepping outside the role it has played for the past few years,” comments Bloomberg. They suggest the limit of what the ECB can do to help resolve the credit crisis.
Indeed, investors signaled disappointment that the ECB had not acted more aggressively and taken more “non-standard measures.” The euro fell to a one-month low, down 1.1 percent to $1.2390 at 4:00pm in New York. The yield on both Italian and Spanish 10-year bonds rose, a sign that the banks’s measures have “not done much to help confidence.”
The optimism that rose after last week’s euro zone summit has indeed faded. Draghi commented that some “downsize risks to the euro zone area economic outlook have materialized.” Analysts interpreted these comments to mean that the “economic outlook has worsened” and that politicians are still figuring out details from last weeks’s summit.
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