The European Central Bank (ECB) has cut its main interest rate to 0.25 percent at a meeting in Frankfurt. The ECB is dealing in euro currency and is the top monetary authority of the Eurozone. The recent cut down is quite unexpected and it surprised financial experts. Most economists thought the bank would wait until December in order to have new analysis and prediction from its own experts.
In addition to its core interest rate the ECB also held the deposit rate that it actually pays on bank deposits at 0% and cut the emergency borrowing rate surprisingly to 0.75% from 1%.Traditionally interest rates have been used as a powerful weapon to control inflation. But at this case this was not the actual problem because in October the inflation of 0.7% way below its 2% target.
Now that the European Central Bank has decided the cut a question arises whether this unexpected cut would make any differences. Financial experts are not optimistic that the cut will bring some significant changes or bring improvement. The ECB is consistently criticized and complained its low rates are not supporting the euro zone trouble spot. Worries remain high about debt levels and lending. So, one can’t say that this unexpected cut will favor euro zone in terms of stability and growth.
Some economists are of the opinion that the ECB has sent a signal of ease loan. As a result of this signal traders involved in euro drive the prices of loans to firms and consumers are expected to have massive significance. UBS is one of the leading forecaster believe that options like negative deposit rates, or the opportunity of long-term cheap loans would have definite impact.
They are of the opinion that quantitative easing is not baseless but cause of impressive impact.Similarly some analysts think that low or flat rates for extended period in time have impacts on firms hedging. They think that in case of such cut down trading in interest rate products typically show a declining movement as because there are no strong needs for some firms to bring their exposure in front. So in their opinion the cut in interest rate would have impact only on hedging side. The overall financial structure of the firm is exempted.
For banks now it is easy to borrow from the European Central Bank as a result of this lower refinancing rate. The main motive of this surprising cut is to encourage banks and other financial institution to give loans at low interest rate. By this way it will be easy for companies to get loan at cheaper rates and expand their businesses finally create some jobs. This is what ECB is expecting from this historical cut in interest rate.
A question here arises whether ECB would meet their objectives of business growth and job creation?
Many economists believe that the cut will have symbolic impact in this regard. They think that banks in certain countries are worried about their own finances therefore; it’s very difficult for these banks to pass on lower interest rate. So, if ECB design a mechanism to have tight check and balance to ferret out hidden losses and compel banks to strengthen their financial structure by raising new capital or restructuring then may be fruitful strategy.
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