The ECB (European Central Bank) has set down measures to improve the 17-nation Eurozone’s prospect for recovery in the latter part of the year. One is a cut in benchmark interest rate from 0.75% to 0.50%. This is the first lowering of interest rate in the past ten months. Another is to extend the availability of cheap bank loans for one more year. These will be offered until July 2014.
One analyst, Howard Archer of IHS Global Insight said that the move to lower the interest rate would probably not have a major impact on growth with the existence of fragmented credit markets. But he added that it is perhaps worthwhile if it has the potential to help the Eurozone.
Close monitoring
Mr. Draghi explains that they are undergoing close monitoring of the incoming date and are conducting continuous assessments to determine whether or not there are any significant indicators with regard to the outlook for price stability. He said that they are maintaining an accommodative stance on monetary policy and will do so for as long as there is a need. Mr. Draghi added that further lowering of interest rates if conditions do not improve is expected.
And perhaps to boost confidence, the ECB is “technically ready” should the situation necessitate negative deposit rates. In the afternoon after the announcement the euro fell. The euro lost 0.6 percent against the pound and fell below US$1.31.
Forecasts and persistent worries
Prior to the announcement, economists predicted that the ECB would lower the interest rates. The forecasters even became more sure when the data for the week became available. One benefit of lowering the interest rates is that this lowers expenses of banks experiencing troubles, particularly those that have benefited from emergency loans from the ECB.
For the month of April, data collated revealed that those who persistently worry about the Eurozone have enough reason to do so. Manufacturing activity markedly shrank last month. In addition, inflation is at the lowest in three years and unemployment is high.
Not seeping through
The ECB may have lowered interest rates, but many are concerned that this is not feeding through to Eurozone economies that need the boost most of all. For example, potential lenders remain worried about Spain and Greece. Does the lower interest rate translate to lowered borrowing costs that businesses will benefit from? The problematic banking sectors of Ireland and Spain make credit rather hard to come by.
No to austerity
The President of the European Council Herman Van Rompuy recommends that it is time to move away from austerity measures. Nations must be thinking about creation of jobs and promotion of economic growth. Patience is growing thin, he said. The call for more stimulus measures and less austerity measures is growing within the Eurozone. There is a perception these days that austerity measures are limiting growth.
Two European Presidents are calling out for austerity policies to be reconsidered and soon, namely the President of France Francois Hollande and the Prime Minister of Italy Enrico Letta.
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