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The European Central Bank (ECB) released its interest rate decision today. The ECB cut its interest rate to 0.15% from 0.25% to economic growth and avoid deflation in the Eurozone. Analysts had expected a cut to 0.1%.
The ECB also cut its marginal lending to 0.40% from 0.75% and reduced its deposit rate to -0.10% from 0.0%. The European Central Bank is the world’s first major central bank to use a negative rate. The deposit rate of -0.10% means that commercial bank will be charged for holding their reserves. This measure should spur commercial banks to ramp up lending.
The European Central Bank President Mario Draghi announced other measures. Long term loans (longer term refinancing operations (TLTROs)) are to be offered to commercial banks at cheap rates until 2018. Two long term loans are scheduled to be launched in September and December 2014. Additional long terms loans will be launched on a quarterly basis until June 2016.
Draghi said interest rates are to remain at the current level for an extended period, further interest rate cuts are not planned and only minor adjustments are still possible. He added that more unconventional measures would be done, if necessary.
The ECB lowered its forecast for economic growth in the Eurozone in 2014 from 1.2% to 1.0% and increased its forecast for 2015 from 1.5% to 1.7%. Inflation rate in the Eurozone is expected to be 0.7% in 2014 (previously 1.0%) and 1.3% in 2015 of 1.3% (previously 1.1%).
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