ECB Cuts Interest Rate To Boost Recovery

Written By Unknown on Kamis, 07 November 2013 | 23.31

The European Central Bank (ECB) has cut its core interest rate in a bid to boost flagging economic recovery in the euro area.

The bank lowered the benchmark refinancing rate to a record low 0.25% from 0.5% at a meeting of its 23-member governing council in Frankfurt.

The move startled many investors while most economists thought the bank would wait to offer more economic stimulus at least until December, when it will have new forecasts from its own staff.

The council was responding to a slump in inflation to 0.7% in October - way below its 2% target and threatening to choke the wider economic recovery.

In addition to the ECB cutting its main refinancing rate to 0.25%, it held the deposit rate it pays on bank deposits at 0% and cut its marginal lending facility - or emergency borrowing rate - to 0.75% from 1%.

EURO V POUND Rate correct at 13.32 GMT

The surprise move underlined the bank's newfound flexibility under its president Mario Draghi.

A lower refinancing rate makes it cheaper for banks to borrow from the ECB, in hopes that that lower rate will be reflected in what companies pay for credit.

That would make it easier for them to expand and create new jobs and growth.

The ECB's UK counterpart the Bank of England had earlier confirmed no change to its own monetary policy - leaving the base rate of interest at 0.5% amid no pressure to raise it yet despite Britain's economic recovery gaining momentum.

The ECB's decision had an immediate effect on the markets - with many of Europe's major stock markets hitting fresh five-year highs while the euro was sharply lower.

The FTSE 100 swung from losses on the day back into the black near its own five-year high on the news.

David Bloom, global head of FX strategy at HSBC said of the ECB: "They want the double whammy of a lower euro on growth and (a boost to) inflation.

"We wanted a stronger response to the stronger euro/dollar and we've got it," he said.


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