European Central Bank cuts interest rate to 0.05% !

European Central Bank cuts interest rate to 0.05% !

12:27 PM, 5th September 2014, About 9 years ago 16

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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.European Central Bank

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Neil Patterson

15:59 PM, 5th September 2014, About 9 years ago

Reply to the comment left by "Mark Alexander" at "05/09/2014 - 15:52":

Reducing rates would just be too massive a signal to the market to be worth risking at this stage.

Roger Lancaster

20:00 PM, 5th September 2014, About 9 years ago

Hi Neil

Out of interest and just so I am reading this right, what signal would a further reduction in interest rates send to the markets and the world in general and what would be the implications of that signal.

Thanks as ever for your contributions to 118 which I find very useful in my more complete understandings of the market in which we dabble.

Neil Patterson

20:37 PM, 5th September 2014, About 9 years ago

Reply to the comment left by "Roger Lancaster" at "05/09/2014 - 20:00":

Hi Roger,

The population's expectations are one of the biggest influencing factors in economics. What people expect to happen will alter the course of the economy.

The housing market has been identified as one of the biggest risks to recovery by the Bank of England. Therefore any show of going soft on future interest rate rises could fuel housing market prices further.

What we think will happen can be more important than what actually will.

When people say they can't trust politicians, that is often true as they are managing expectations for the good of the economy.

Roger Lancaster

16:00 PM, 6th September 2014, About 9 years ago

Thanks Neil. Understand exactly where you are coming from. Once again our media and their frenzied reporting and sensationalist headlines do more damage to our economy than the Banks ever did. Oh for a balanced press.

Steve Gracey

16:43 PM, 11th September 2014, About 9 years ago

Reply to the comment left by "Neil Patterson" at "05/09/2014 - 20:37":

In this world of internet and global economy would there be any opportunities for UK borrowers to borrow at Euro rates if ECB and BoE rates did continue to diverge?

I seem to remember that years ago before the credit crunch there were a few products where you could get a mortgage in Euros or maybe even Swiss Francs. Were these linked to ECB / Swiss interest rates? I know it's complicated by exchange rate fluctuations but I'd love to pay an interest rate equivalent to a couple of stale croissants every month.

Neil Patterson

21:22 PM, 11th September 2014, About 9 years ago

Yes I do remember those Euro mortgages back in the day, but haven't seen them since the melt down.

The problem is banks aren't lending so the ECB are trying to make it too expensive for them not too. Only time will tell, but Japan is not a good example of it working.

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