European Central Bank cuts key interest rate for eurozone to record low
The European Central Bank (ECB) has announced it reduces its key interest rate from 1% to 0.75%, a record low for the eurozone.
The move comes as the eurozone economy continues to be weak.
The ECB also cut its deposit rate, from 0.25% to zero.
A cut in the ECB’s deposit rate is designed to stimulate lending between banks, as funds placed with commercial banks overnight are currently receiving 0.3% in interest.
Surveys released earlier this week indicated that the eurozone’s service sector had continued to shrink in June and that business confidence had fallen.
The ECB’s president, Mario Draghi said the eurozone was likely to show little or no growth in the second quarter of the year, but should recover somewhat by the end of the year.
Mario Draghi, said the eurozone economy faced risks, but that inflation did not appear to be a threat: “Inflation rate pressure…has been dampened. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment.”
At a media conference following the announcement of the decision he was asked it the situation was as bad as in 2008, to which he replied: “Definitiely not. We are not there at all.”
The rate cuts come despite an inflation rate running above the 2% target for the single-currency zone.
But the rate has been sliding recently and is expected to fall to an average of 1.6% next year.
An interest rate below inflation is meant to discourage saving and promote investment, as the interest rate does not keep pace with inflation, meaning the value of the money on deposit is eroded.
The interest rate cut is the third since Mario Draghi became ECB president late last year.
Mario Draghi said the decision on rates was unanimous.
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