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ECB Rate Cuts Now Imminent

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Sources at the European Central Bank (ECB) have this morning let it be known that the Bank is preparing a package of monetary stimulus measures to be approved at the next meeting of the Governing Council on June 5th.

An interest rate cut is “more or less a done deal” cited one particular source close to the Bank’s decision makers. There is not yet clarity on which interest rate the individual was referring to but speculation is mounting that both the key Refinance Rate and the Overnight Deposit rate could be targeted with cuts of between 10 and 20 basis points. The Refinance Rate is currently at 0.25% and has been since November of last year. The Overnight Deposit Rate is at 0% so any reduction in this would take it into negative territory, effectively charging banks money to keep their funds on deposit with the ECB. This latter measure it is hoped would encourage greater lending in the interbank market and consequently increase liquidity in the financial system.

Off the table for now appears to be the promised Quantitative Easing program. Markets had been aggressively speculating that this would be the next likely course of action from the ECB, government bond yields in troubled Eurozone periphery economies have been lower than those of some other developed economies that are further along the recovery curve. This has enabled some countries refinance portions of their public debt and also stockpile some cash reserves at very low interest rates. It is likely that if the ECB officially confirms that it will not pursue a large scale quantitative easing program that the cost of Government funding will rise over the coming months. Quantitative Easing has not been completely ruled out for the future, but the structure and make up of the European Union makes it a technically and legally difficult path for the ECB to pursue.

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