The European Central Bank (ECB) has lowered its benchmark interest rate to 0.15% from 0.25% in an effort to stimulate economic growth and avoid deflation in the eurozone.
Vanishing interest rates. ECB President Mario Draghi squeezes rates close to zero - and below
It has also reduced its deposit rate below zero, to -0.1%,
which means commercial banks will have to pay to lodge their money with the
central bank, rather than receive interest.
The idea is to incentivise the banks to lend to businesses,
thereby stimulating growth.
The ECB is the first of the "Big Four" central
banks (the ECB, the US Federal Reserve, the Bank of Japan and the Bank of
England) to do this.
Howard Archer, chief UK and European economist at IHS Global
Insight said: "Despite being widely anticipated and in some quarters
criticised for occurring too late, it is still a bold and unusual move by the
ECB to take its deposit rate into negative territory."
"There has to be considerable uncertainty as to how
effective negative deposit rates will turn out to be," he added.
It has been tried before in smaller economies. Sweden and
Denmark, who are both outside the Single Currency, attempted to use negative
rates in recent years with mixed results.
Analysts said in Sweden it had little discernable impact; in
Denmark it did have the effect of lowering the value of the currency, the
Krone, but according to the Danish Banking Association it also hit the banks'
bottom line profits.
Unconventional
measures
The ECB's president, Mario Draghi, also announced other measures.

It's also doing preliminary work that would lead to buying
bundles of loans that are made to small businesses in the form of bonds. This
is being seen as a step towards providing companies with credit through the
financial markets.
Mr Draghi said the ECB's policymakers unanimously agreed to
consider more unconventional measures to boost inflation if it stays too low.
He insisted that more would be done, if necessary.
"Are we finished? The answer is no. We are not finished
yet," he said.
Shares
jump, euro falls
Even though some of the measures, like the more to negative
rates on deposits, were expected European shares moved higher on the ECB
announcements.
The benchmark German DAX 30 index jumped about the 10,000
level for the first time. The CAC 40 in Paris gained 0.77% shortly after the
ECB's comments.
Meanwhile, the euro plunged to $1.3558, its lowest level in
four months.
Deflation
fears
Although the danger of deflation in the eurozone is limited,
the ECB is concerned that growth is very sluggish and bank lending weak - both
of which could potentially derail the fragile economic recovery.
The eurozone economy is only growing at 0.2%. Consumer
spending, investment and exports are all growing at a slower pace than this
time last year.
Inflation in the Eurozone fell to 0.5% in May, down from
0.7% in April. This is well below the European Central Bank's 2% target.
Unemployment
If the eurozone slips into deflation, consumers would spend
even less because they'd expect prices to fall in future months. For the same
reason investors stop investing.
Growth would then grind to a halt and demand would be
severely constrained. The large debts amassed by the eurozone's countries,
companies and banks would take longer and be harder to pay off.
Unemployment, which is already at nearly 12% in the
eurozone, and much higher in places like Spain, Portugal and Greece, would get
even worse.
It's a picture that prompted today's moves by Mario Draghi
and the 23 other members of the governing council at the European Central Bank.
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