By: Dr. Mike Campbell

In the major democracies, central banks are free from direct governmental influence as they go about their business of trying to keep the economies growing whilst holding inflation in check. The broad idea is that cheap money supply will stimulate economic growth, but this is counter-balanced by inflation which can rise under a loose monetary policy.

The ECB has decided that rates will stay on hold at 1% this month following on from two months of cuts instigated by the in-coming President of the organisation, Mario Draghi. The cuts had been instigated to spur economic activity within the 17 member Eurozone block. Business sentiment has been suffering from concerns about the seemingly intractable problem of Eurozone sovereign debt and a slowdown of demand in the wider global economy. At a news conference, the President remarked that the economy of the Eurozone block was continuing to experience "high uncertainty and substantial downside risks".

Analysts are anticipating that the ECB will cut rates again later in the year. This is likely if the block does enter a technical recession since it would be likely to have a deflationary effect on prices, leaving the ECB more room for manoeuvre. Since its inception 13 years ago, ECB interest rates have never dipped below the 1% level.
The UK chose to remain outside the Eurozone and infuriated many by “vetoing” plans for tighter fiscal unity which would predominantly have affected members of the block. Whilst the UK will participate in the talks in the role of observer, British Euro-sceptics saw it as a triumph. The Monetary Policy Committee of the Bank of England has also been in session and decided to leave UK rates on hold at 0.5% continuing with a policy that has been in place since March 2009.