EU Interest Rate Cut

EU Interest Rate Cut.

The European Central Bank (ECB) is having its monetary policy committee (MPC) meeting today and is expected to cut base interest rates.

The ECB rate is currently 0.25% which is the lowest in the western world. However, there is little economic growth in the Eurozone.

Inflation is at 0.5%, virtually no rises in prices and a real risk of moving into deflation, the same problem Japan had for over a decade. In short, people stop spending money because it is cheaper to buy goods next month or next year, further slowing down the economy.

Countries like Spain, who this week announced a €6bn economic stimuli package, still have mass unemployment, with over a quarter of the working population unemployed, and similar figures for Greece.

Many pundits are suggesting that the ECB could rates to just 0.1%pa. Others suggest that the ECB could move to negative interest rates i.e. charge Countries and Banks to have their money held on deposit with the ECB.

Comment – What this means for you?

Exchange rates for the € will fall i.e. your holiday £ will buy more euros.

European produced goods will become cheaper to overseas importers. This means that British goods in Europe will become more expensive this creating demand for Euro goods rather the British, US or fare eastern goods.

Europe must do something to increase activity, employment and prevent Europe moving into reverse with deflation.

Expect other measures too such as forcing banks to lend more money into Euro economies.