European Central Bank cuts interest rate to 0.05% !

by Neil Patterson

4 years ago

European Central Bank cuts interest rate to 0.05% !

Make Text Bigger
European Central Bank cuts interest rate to 0.05% !

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.European Central Bank

Comments

Neil Patterson

4 years ago

I like Robert Peston's description of 0.05% interest rate as "zero plus the price of a stale croissant".

David Lawrenson

4 years ago

Good summary Neil, as ever.

Personally I think it extremely unlikely that the BOE will raise base rates within next year.

Unless I am missing something (and need to go back to Uni again and study my basic economics), this is why....

Main trade block is EU. As they are getting deflation, that deflationary effect inevitably gets to impact our own economy via imports. With deflation being pumped in (combined with falling real wage rises), it seems unlikely there would be a rise in interest rates here.

I really think that the BOE sabre rattling on the possibility of rising rates here is utter nonsense, given the backdrop in the EU of deflation - and is simply a bid to counter rising house prices in London and the SE.

I don't believe a word of it, and I am amazed that other personal finance writers believe any of it either.

David Lawrenson
LettingFocus.com

Neil Patterson

4 years ago

Reply to the comment left by "David Lawrenson" at "05/09/2014 - 12:43":

Yes I agree with you too David

Mandy Thomson

4 years ago

Reply to the comment left by "David Lawrenson" at "05/09/2014 - 12:43":

Absolutely - plus, looking at the housing "market" (can we really talk about one single UK housing market?) alone we are already seeing a cooling, at least in London, brought about by the introduction of MMR (and possibly fears of interest rate rise...). This, together with high personal debt, the national deficit, low wages and a large proportion of new jobs still being low paid, means it wouldn't take much to destabilise our own recovery... This before we take into account the impact a Scotland "yes" vote could have, and/or a radical change in economic policy if a new government is elected next year.

Romain Garcin

4 years ago

I think the key is devaluation (and QE is devaluation of some sort).

The UK and the US have in effect devaluated their currencies at some point during the crisis: We saw the Pound dropping to parity with the Euro at some point and inflation spiked to 5%.
Even now, the Pound is still below its pre-2007 level against the Euro.

It seems that the ECB has absolutely refused anything of the sort so far (I'm guessing the Germans don't want to hear about it).

Don Holmes

4 years ago

Hi Neil
As someone with an asset base in the Euro zone (Portugal) some "under water" rental apartments, I am closely watching and I have to say still sparring with our lender BBVA
and second guessing all the time what they may or may not do?

I am assuming, The Asset purchase program AND "The ECB will be buying financial assets" refers more to bank bonds and larger financial instruments? But could you elaborate a little. Thanks Don

Neil Patterson

4 years ago

Reply to the comment left by "Don Holmes" at "05/09/2014 - 13:09":

Hi Don,

The ECB President Mr Draghi said: "The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme.

"This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter."

Exactly what will be purchased I couldn't tell you and I doubt the ECB have that information yet either.

Don Holmes

4 years ago

O" Thanks Neil I am much clearer now! LOL

Keep watch hey?

Neil Patterson

4 years ago

Reply to the comment left by "Don Holmes" at "05/09/2014 - 13:48":

Yep, Hopefully I was a clear as mud for you there lol

Mark Alexander

4 years ago

Fascinating discussion, pity I purchased my Euro's for my trip to Spain this weekend a week ago though 🙁

I wonder whether the BoE will come under pressure to actually reduce rates. My reading into this is that they might come under such pressure to control our trade defecit with Europe.
.

1 2

Leave Comments

Please Log-In OR Become a member to reply to comments or subscribe to new comment notifications.

Forgotten your password?

OR

BECOME A MEMBER

Mick Roberts on BBC Radio Nottingham