No Surprises from ECB Rate Cuts

The European Central Bank (ECB) today lowered its main policy rate to 0.75% in a move that was widely anticipated by the market. The rate cut sets the bank’s lending rate below 1% for the first time ever.

In a related move, the ECB cut its deposit rate to 0% as it tries to encourage inter-bank lending and persuade banks to make more loans.

The ECB’s moves come on the same day that the Bank of England left its policy rate unchanged at 0.5% but increased its asset purchase program by £50 billion and China lowered its lending and borrowing rates as well. In the US, the Federal Reserve’s interest rate is already effectively zero, but the bank will extend its so-called “Operation Twist” through the end of the year.

The policy moves by the four central banks are a response to the slowing of the global economy, and the ECB’s adjustments are an attempt both to light a fire under the Eurozone’s economy and to provide some help to the continent’s teetering banks. The rate cuts won’t do much for the overall economy because rates were already very low, but Spanish banks ought to get a bit of help from the lower rates in the money market.

No one expects great things to result from today’s ECB announcement, but the main takeaway from today’s events in the Eurozone, the UK, and China is that everybody now appears to be singing from the same hymnal. The global economy is faltering, and perhaps by acting in concert — even if accidentally — central banks can begin to restore confidence in the global financial system. It’s weak tea, but it’s a start.

Paul Ausick