ECB set to lower its interest rate to 0.5%

The ECB is expected to lower its interest rate today possibly to 0.5% in a further bid to kick-start growth and take the eurozone out of recession.

EU unemployment hit a new record high with 19m jobless while inflation dipped further to 1.2% last month — down for the third month in a row.

Enrico Letta, Italy’s new socialist premier, added his voice to those demanding an end to austerity and a greater push for growth.

But the same problem that caused the crisis is once again raising its head — the difference between the economies of the eurozone and the fact that they are at different phases of the cycle.

Just last week German chancellor Angela Merkel pointed out this as expectations rose that the ECB will agree a rate cut at its meeting today in Bucharest. Rates are already at an all-time low of 0.75% since they were last cut in July.

She pointed out that the cut would not suit Germany at this time, but made reference to the fact that it would suit some of the eurozone’s struggling economies. Speaking to a savings bank conference in Dresden, she said the ECB had a difficult task setting an interest rate that met the needs of all countries.

“This means on the one hand the lowest possible interest rates for EU crisis countries so that they have access to the urgently needed liquidity. On the other hand, Germany would need a higher interest rate because savings are currently losing value,” she said.

Her remarks were viewed by some as a shot across the bow of the ECB on outright monetary transactions — the ECB’s announced but as yet unfulfilled plan to buy up bonds of eurozone economies having difficulties in the market.

The head of the German Central bank, the Bundesbank, Jens Weidmann resigned over the issue warning that outright monetary transactions would breach rules against ECB engaging in monetary financing.

But in an indication that a rate cut may not be a foregone conclusion, ECB policy head Jorg Asmussen cautioned that further easing of rates may not meet the needs of troubled economies. The ECB had addressed bank funding but the money was not being transmitted to businesses and the real economy.

“Risk aversion, a lack of loan demand and insufficient capital was to blame,” he said, adding this will change only when bank balance sheet repair was complete in all eurozone countries.

The IMF on the other hand has said there was room for a rate cut. “There is still a bit of room for further easing, especially given subdued inflationary pressures,” said the body’s first deputy managing director, David Lipton.


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