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Along with an asset purchase scheme to increase the supply of money the European Central Bank (ECB) has cut rates to 0.05% from its previous low figure of 0.15% introduced in June.
After this announcement made yesterday the Euro fell to its lowest point against the US Dollar for over a year at $1.2996.
The Asset purchase program will add liquidity into the European banking system to hopefully encourage lending, but it is a halfway house falling short of the full Quantitative Easing measures employed by the UK and USA. The ECB will be buying financial assets rather than government debt.
This is an effort to avoid falling into a potentially disastrous spiral of deflationary economic contraction with growth and inflation levels at dangerously low figures already.
What does this cut mean for the Bank of England Base rate? Nothing is for certain, but this weakening of the Euro and potentially more assets and cash being attracted to the UK will harden the Sterling exchange rate, and put more pressure on our already massive trade deficit with Europe. Especially as the ECB have also increased the interest rate it charges banks for depositing their cash with it from minus 0.1% to minus 0.2%.
Any increase in UK interest rates would only serve to exacerbate the trade deficit in the short term and potentially harm our own recovery.
There is a lot to think about before the Monetary Policy Committee consider raising UK interest rates as they must take into account the medium term recovery implications rather than any short term pressures that may not last.
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