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Central bank in Europe drops lending rates to record low (New York Times)

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The European Central Bank cut its benchmark interest rate to 0.75% from 1%. Economists are likely to welcome the cut, but it does carry risks. Interest rates near zero will limit the bank’s selection of conventional monetary policy tools available to combat the financial crisis. The cut could increase speculation that the E.C.B.’s next step would be massive purchase of government bonds. This might help contain borrowing costs for Spain and Italy, but could outrage Germany and threaten the unity of the euro zone. Should the E.C.B. suffer losses on its bond holdings and need to ask for more capital from euro zone countries, Germans fear that they would bear a large share of that burden. The E.C.B. also cut the deposit rate to zero, but it’s unclear whether that will restart the interbank money market, which is a key source of short-term funding for banks.

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