In its policy meeting, the European Central Bank (ECB) unexpectedly cut interest rates, reducing all its three main rates by 10 basis points. The deposit rate is now -0.2 per cent. The vast majority of economists polled in a survey by Bloomberg News predicted no change in interest rates in last week’s meeting.
The rate cuts come three months after a historic package of stimulus measures by the ECB. Lower interest rates are intended to encourage economic growth and ward off the threat of deflation. Additional measures the ECB could unveil later may include a purchase programme for asset-backed securities that risks dividing policymakers.
The Bank of England left its benchmark interest rates unchanged at 0.5 per cent. This in the face of stubbornly low inflation and weak wage growth that underscore the argument for a loose monetary policy.
Other issues that played a part in the decision to keep rates at a record low were weak growth in the eurozone, the UK major trading partner, and tensions between the western powers and Russia over Ukraine.
This month’s meeting is the last before a vote in Scotland on September 18 that may lead to Scotland seceding from the UK.
In the meantime, Germany’s GDP shrank by a seasonally-adjusted 0.2 per cent in the second quarter compared with the previous quarter, after growing 0.7 per cent in the first quarter, the German statistics agency said last week, confirming its preliminary estimates. Compared with the same quarter last year, GDP grew 1.2 per cent in the second quarter, also unchanged from the first estimate.
Europe’s largest economy is going through a soft patch as investors are wary of the growing geopolitical risks. This is putting pressure on the ECB to introduce measures to boost the economy.
Separately, German factory orders rose an adjusted 4.6 per cent in July compared with June.
This is the biggest jump in more than a year and may indicate that the decline in growth was short-lived.
This article was compiled by Bank of Valletta for general information purposes only.