The European Central Bank (ECB) surprised the global market on Thursday with its decision to cut its interest rates. The bank slashed its benchmark interest rate by a quarter percentage point to a record low 0.25% in order to support Euro zone growth. Marginal lending rate was also reduced to 0.75% from 1% while deposit facility rate remains unchanged.
Behind the Rate Cut
Though the Euro zone emerged from an 18-month recession in the second quarter with 0.3% expansion, the recovery still seems fragile. Tumbling inflation and higher unemployment might stall the burgeoning Euro zone economic recovery.
Inflation fell from 1.1% in September to a record low of 0.7% in October. The number is also well below the ECB inflation target of under 2%. Unemployment across the Euro zone remained at the record high of 12.2% in September (read:Europe ETF investing 101).
The European Commission (EU) expects unemployment in this 17-country bloc to remain near the record high until 2015 while inflation would be at lower levels of 1.5% this year and could further drop to 1.4% in 2015. This suggests that the Euro zone might experience a prolonged period of low inflation.
Thanks to weak private demand and investment, the agency sees the economy shrinking 0.4% this year, and slashed its economic growth outlook from 1.2% to 1.1% for the next year.
Euro Zone Grows Slow
Still, various data points suggest that the Euro zone is gaining momentum albeit at a slower pace despite low inflation and elevated unemployment.
Economic and business confidence is rising in the 17-country bloc, indicating a new era of growth for the continent. In fact, the confidence indicator continued to rise in October for the sixth time with growth of 0.9%.
Further, Euro zone manufacturing activity accelerated in October for the fourth consecutive month to 51.3 from 51.1 in September. Germany, Ireland and Spain recorded robust growth while France and Greece failed to expand.
In an effort to support the Euro zone’s revival, the ECB President – Mario Draghi – is committed to provide ample liquidity to banks when needed until at least July 2015.
The surprise move by ECB led to a sharp sell-off of the euro against the U.S. dollar. The euro fell 0.8% against the greenback on Thursday at the close after slipping as much as 1.6% on the day, which marks the biggest drop in two years.(...)Click here to continue reading the original ETFDailyNews.com article: Euro ETF Impact On Surprise ECB Rate CutYou are viewing an abbreviated republication of ETF Daily News content. You can find full ETF Daily News articles on (www.etfdailynews.com)
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