The latest rate decision from the European Central Bank will be announced today at 12:45 GMT. This is the most eagerly awaited rate decision, certainly for quite a few months, possibly ever, especially after President Mario Draghi hinted in their meeting last month that they would act today. Many economists are expecting an unveiling of a package of measures but there are some discrepancies over the exact ones to be used.
Since the May meeting, pressure has only increased on President Draghi to act. Euro zone CPI fell to +0.5% on Tuesday, slightly down on the expected figure of +0.6%, falling from the previous month of +0.8%. Deflation throughout the Euro zone has remained a distinct possibility, inflation falling to 0.5% in May considerably below the ECB’s goal of just below 2%. This essentially means that growth grinds to a halt as consumers are put off spending any money as they expect prices to fall further, thus having the knock on effect of causing investors to stop investing. Couple this with the continued unemployment crisis in the Euro zone and you have a strong argument for a rate cut.
At 0.25%, the benchmark interest rate is already low but the overriding feeling is that the ECB needs to cut it again, the predicted figure for this cut being 0.1%. A rate cut alone, however, is not going to suffice, and it is expected to be used together with cut in the rate it pays on deposits from the banks to below zero which will be unprecedented. This will in effect mean that the banks will actually end up paying the ECB for keeping their money, creating an incentive for them to lend that money elsewhere, ideally to businesses, thus hopefully boosting growth.
Questions still remain that even this may not be enough and everyone will be waiting with bated breath as to whether Draghi will start talking about other possibilities such as asset purchases or adopting possible Quantative Easing measures to attempt to boost the economy. Only time will tell.
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