Central Bank in Europe Drops Lending Rates to Record Low
Source: NYT
The European Central Bank cut its benchmark interest rate to its lowest level ever on Thursday in perhaps its most aggressive move yet to unblock the flow of credit and prevent further deterioration of the euro zone crisis.
The E.C.B. cut its benchmark rate to 0.75 percent from 1 percent, which was once regarded as the lower bound on the official rate. Economists and political leaders are likely to welcome the cut, which was expected by most analysts, as offering welcome relief from strains in the euro zone. But it also carries risks.
With interest rates now close to zero, the bank and its president, Mario Draghi, will have a dwindling selection of conventional monetary policy tools they can use to combat the crisis. The cut Thursday is likely to increase speculation that the E.C.B.’s next step to contain the crisis would be massive purchases of government bonds, similar to the quantitative easing undertaken by the U.S. Federal Reserve.
“The E.C.B. is aware that cutting rates to their lower bounds is likely to fuel market expectations that an outright Q.E. launch will follow shortly after,” Jens Sondergaard, analyst at Nomura, said in a note to clients ahead of the rate decision.
Read more: http://www.nytimes.com/2012/07/06/business/global/markets-look-to-europes-central-bank-for-action.html
