The European Central Bank (ECB) cut interest rates in the eurosystem by 25 basis points today, from 0.75% to a record low of 0.50%.
Putting it mildly, the emergency rate cut was driven by persistently weak economic performance among the members of the eurosystem. Most notably, unemployment among the 17 member countries that use the euro recently set a record at 12%.
"Weak economic sentiment has extended into spring of this year," said ECP President Mario Draghi after announcing the rate reduction. "The cut in interest rates should contribute to support prospects for a recovery later in the year," he added, leaving the door open for future cuts should they become necessary. "Against this overall background, our monetary policy stance will remain accommodative for as long as needed. In the period ahead, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability," said Draghi.
The rate cut was no surprise to markets, but certain details mentioned by Draghi during his press conference raised some eyebrows among analysts. "Draghi confirmed at the press conference that the ECB is open to a negative deposit rate, which would effectively charge banks to deposit funds with the ECB and therefore act as a major incentive to boost lending," said Craig Erlam, market analyst at Alpari. "Obviously, as we’ve seen both in the eurozone and the UK, incentives don’t guarantee anything. However, this would be a bold step from the ECB and has understandably been met with approval in the markets."
However, Erlam remained skeptical that today's rate cut would jump-start a huge turnaround in the European market. "All things considered, the one thing to take from this is that the ECB has done nothing that is going to improve circumstances in the short term," he said. "Basically, it’s business as usual in the eurozone."
- Jacob Barron, CICP, NACM staff writer