After weeks of speculation, the interest rate in the eurozone will be slashed to 0.15% by the European Central Bank.
The Bank also announced a negative interest rate of –0.1% for banks depositing money with the ECB. The objective is to encourage banks to lend more money instead of paying the ECB to store their funds.
The package of measures is designed to stimulate growth and stave off deflation.
ECB President Mario said the stimulus package included more cheap loans for banks.
Long term loans are to be offered to commercial banks at cheap rates until 2018. These loans would be capped at 7% of the amount that the individual banks lend to companies. So the more banks lend, the more they can borrow at cheap rates from the ECB.
If inflation remains too low, the Bank’s Governing Council unanimously agreed to consider some type of quantitative easing.
The Bank of England and the US Federal Reserve have both injected huge sums of money into their economies under quantitative easing programmes, but the ECB has so far been resistant to using this measure as a number of countries, particularly Germany, have been opposed to it.
The credit easing measures announced were welcomed by analysts who believe they will increase liquidity in the eurozone and cut borrowing costs for eurozone members in the southern periphery.
Inflation in the eurozone fell to 0.5% last month. Consumers purchase less when inflation is low when what countries need to increased domestic demand. It also makes it more difficult for governments to repay their loans.
