ECB Cuts Rates to 0.75%, Deposit Rates to Zero

Move designed to stimulate economy, cope with debt crisis as BoE holds rates

The European Central Bank (ECB) cut its benchmark rate from an already-low 1% to a new record of 0.75%, in the hope that it would kickstart an economy on the skids. It also cut its deposit rates to zero, aiming to persuade banks to lend cash to one another instead of reaping interest on as much as 800 billion euros ($995.229 billion) that are deposited with the ECB each night.

Reuters reported that a cut was expected in the lending rate by economists polled earlier. Some had expected a more drastic cut, to 0.50%. The move is not what International Monetary Fund (IMF) Managing Director Christine Lagarde had hoped for; she had urged the ECB to resume government bond purchases in what would have been a bolder intervention in the crisis.

However, the ECB chose instead to act through interest rates, saying that bond purchases would only be a last resort. In a magazine interview released Wednesday, ECB Governing Council member Klaas Knot was quoted saying, "The bond buying program is in a deep sleep, and it will remain there."

The Bank of England (BoE), meanwhile, held firm on its benchmark interest rate at 0.5%, already a record low, according to a New York Times report that said it increased its bond purchase program. It added £50 billion ($78 billion) on top of the £325 billion it has already committed to the program.

According to George Buckley, chief U.K. economist at Deutsche Bank in London, the move by the BoE will add 0.5% to the country’s GDP. He was quoted saying, “This is helpful at the margins, but the big issue is what happens to the European economy as that will be transmitted across the English Channel. 50 billion pounds in quantitative easing is not going to solve the problems. All the Bank of England can hope to do is to offset some of the headwinds from Europe.”

Halfway around the world, China cut its own benchmark rates for the second time in a month and paved the way for banks to offer larger discounts on lending costs. Effective Friday, Bloomberg reported, the one-year lending rate will drop by 31 basis points and the one-year deposit rate will fall by 25 basis points.

Slow growth has plagued the massive economy and as a result it is “fine-tuning” its fiscal policies to boost expansion, which has suffered as the rest of the world is mired in financial woes.

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