European Central Bank cuts main refinancing interest rate to 0.5%

The European Central Bank (ECB) announced on Thursday 2^nd that it is cutting the main refinancing interest rate by 25 points to 0.5 per cent highlighting continued concern over the health of the euro zone.

The move by the ECB is an attempt to promote lending to small-medium enterprises that, as is especially evident in countries such as Ireland and Spain, are experiencing significant credit issues.

The move has also been seen as a reaction to the news on April 30^th that euro zone unemployment continued to rise to 12.1 per cent while inflation fell sharply from 1.7 to 1.2 per cent.

ECB president, Mario Darghi, followed the announcement with reassurances that he is keeping an “open mind” about imposing a negative interest rate on commercial banks wishing to deposit money at the central bank. 

While some have claimed that such a move would incentivise banks to lend more, the ECB has in the past expressed caution over such action.  Commercial banks in Denmark have been subject to negative interest rates, but rather than lending more, they have been passing the costs onto borrowers.

By the end of trading the euro was down by one per cent against the dollar to below $1.31.

Peter Winnicki