ECB Cuts Key Rate to Record Low to Fight Deflation Threat
Comment of the Day

November 07 2013

Commentary by David Fuller

ECB Cuts Key Rate to Record Low to Fight Deflation Threat

Here is the opening from this Bloomberg report
The European Central Bank cut its benchmark interest rate to a record low after a drop in inflation to the slowest pace in four years threatened its mission to keep prices stable.

Policy makers meeting in Frankfurt today reduced the main refinancing rate by a quarter point to 0.25 percent. The decision was predicted by three of 70 economists in a Bloomberg Newssurvey. The ECB kept its deposit rate at zero and trimmed the marginal lending rate to 0.75 percent. ECB President Mario Draghi will hold a press conference at 2:30 p.m.

The ECB now has just one more quarter-point cut left before reaching zero, increasing the likelihood of unconventional tools such as quantitative easing or a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB's target and unemployment is at the highest level since the currency bloc was formed in 1999.

"There comes a point where inflation is so weak, and coming in weaker than anticipated, that the case for loosening policy becomes too hard to resist," said Richard Barwell, senior European economist at Royal Bank of Scotland Group Plc in London, who predicted the cut. "Bad unemployment numbers only make the case stronger."

David Fuller's view The ECB's Mario Draghi is trying to assist the Eurozone's fledgling recovery by softening the Euro against the US Dollar (weekly & daily). He is having some success in this effort because the forex market began to anticipate this rate cut last week and the single currency's uptrend since mid-year has now lost momentum.

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