The European Central Bank (ECB) has reduced its interest rate from 1% to 0.75% in a bid to stimulate economic activity within the Eurozone by reducing the cost of finance. The level is now at an historic low and accompanied a reduction of the deposit rate from 0.25% to zero. The president of the ECB, Mario Draghi was downbeat about the Eurozone’s prospects for Q2, expecting that there will be little or no growth when figures emerge later this month, but he was more bullish for Q4. Business confidence fell in June and the Eurozone’s service sector shrank according to a survey which was released last week.
Mr Draghi was asked if the situation facing the bloc now was as bad as in 2008, at the height of the global financial crisis; his answer was emphatic: "Definitely not. We are not there at all." He was also confident that inflationary pressure was not a problem in the Eurozone at the moment, despite the fact that it is currently above the ECB target figure of 2%. The rate is expected to come in at an average of 1.6% next year, giving the bank latitude to reduce rates now. The cut in the ECB interest rate is the third since Mr Draghi became its president last year.
The Bank of England left its interest rate on hold at 0.5%, but it announced plans to inject a further £50 billion into the economy through its quantitative easing mechanism. The bank gives money to private sector institutions to buy state assets (bonds) which helps to keep the yield on UK bonds low, reducing borrowing costs. The idea is that banks will lend the commissions that they make on the transactions to business, thereby improving liquidity in the economy.