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ECB Reduces Interest Rates

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ECB Reduces Interest Rates

The European Central Bank (ECB) has just completed one of it’s most anticipated Governing Council meeting’s of the year. The Bank has finally capitulated to market pressures and taken definitive action to further reduce interest rates within the Eurozone.

Today’s action consisted of a cut to Bank’s benchmark Refinance Rate of 10bps from the 0.25% level it has been at since last November to a new record low level of 0.15%.
Additionally, the ECB has entered new central bank territory by cutting it’s Overnight Deposit rate from 0% to -0.1%. In taking this rate negative the ECB is projecting that liquidity will be freed up within the banking system as individual banks balk at effectively being charged to deposit their funds and instead seek out other private sector lending opportunities.

There was no action taken with regard to a quantitative easing program. This has been on the agenda since the end of Q1 this year but the concept of fairly purchasing sovereign bonds from 18 different governments brings with it it’s own unique challenges. This combined with pushback from the German authorities has meant that the difficulties involved in implementing such a program has relegated it to the status of last resort.

The ECB had little scope for any significant reduction in the already record low interest rates. It is however questionable as to whether the Governors consider today’s meager 10bps cut as sufficient to stimulate a very sluggish Eurozone economy that is already on the brink of deflation. It is more likely that today’s cut is nominal in nature, it is a sign to the market that the ECB, which has recently been criticized for it’s inaction, is in fact prepared to take the necessary steps when required.

There are many questions regarding the ECB’s thought process that the Bank’s president, Mario Draghi, will be expected to answer during a much anticipate press conference this afternoon.

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