The European Central Bank has reduced its interest rates for the first time in over a decade. It has lowered its key rate 25 basis points to help support a weakening eurozone economy. The bank has lowered its main deposit rate from 3.5 to 3.25 percent, the third reduction this year. This is a result of reducing the cost of borrowings from an all-time high of 4 percent.
A range of data confirmed that the major economies in the EU are struggling. According to the OECD’s projections, Germany is expected to grow by only 0.1 percent this year. The eurozone as a group will expand by 0.7 percent.
The ECB has set a target of 2% for the region. In September, the inflation rate fell to 1.7 percent from 2.2 percent the month before. The wage pressures that are often cited as the main source of inflation concern have also decreased more quickly than anticipated.
In the ECB governing council, concerns about inflation were pushed aside in favor of a desire for economic stimulation.
Mark Wall, chief European Economist at Deutsche Bank said that the decision to reduce interest rates in back-to-back sessions for the first 13 years represents a pivotal point towards a faster normalisation monetary policy.
Matthew Landon of JP Morgan Private Bank’s global market strategist said that the ECB wished to send a clear signal to the market, that its concerns have shifted from inflation to economic growth.
The governing council announced the latest rate cut in a press release. “The information received on inflation confirms that the deflationary process has been well-advanced.”
The report said that “recent surprises in economic indicators” were to blame for the lower inflation forecast.
Traders on financial markets believe that the ECB will continue to reduce borrowing costs in the next year, and at a quicker pace than the Bank of England or the US Federal Reserve. The governing body said that it “was not pre-committing” to any particular rate path.
Money markets expect the Bank of England to make two more cuts this year, which would bring its borrowing rate down to 4.5 per cent. This follows a first cut from 5.25 per cent to 5 per cent in August. Money markets expect the Bank of England to make at least two more cuts in this year. This would bring its borrowing rate down to 4.5 percent, after reducing it from 5.25 to 5 percent last August.
Tomasz Wieladek is the chief European economist for T Rowe Price. He said that while the ECB speaks about a weaker economy, it also acknowledges the high inflation and wage growth in the country. This balanced language shows that the ECB is open to all options.
The euro fell by 0.21 percent against the pound, to 83p, and rose slightly against the US dollar. The Stoxx 600 pan-European index rose by 4.33 per cent or 0.83 percent to 523.94. The London FTSE 100 index rose by 0.67 percent, or 56.06 points, to 8,385.13.
The yields on government bonds in the eurozone have increased slightly. The rate for the German Bund 10-year bond has risen by two basis points, to 2.109 per cent.
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