Interest rates sink to record lows … again

Economists don’t think the ECB move will have much of an effect on the floundering European economy

In an attempt to kick-start Europe's flailing economy, the European Central Bank (ECB) lowered interest rates to record lows on Thursday.

Meeting in Bratislava, Slovakia, ECB bankers cut the main refinancing rate to 0.5 percent from 0.75 percent, a reduction of 25 basis points, in a response to the latest disappointing European key financial figures.

The interest rate cuts, which were largely predicted by leading economists and under discussion since March, is an attempt to generate more activity in the Eurozone.

“The ECB have been under pressure to do something for a while now, particularly because of the significant eco-political modifications in the form of large and advertised purchasing of bonds, which central banks in the US, the UK and Japan have pushed through,” Helge J Pedersen, the head economist for Nordea Bank, told Jyllands-Posten newspaper.

But Pedersen said that the interest rates were already extremely low and it is therefore doubtful whether a further reduction will have any kind of effect.

“But more indirectly, the reduction can still create influence via a positive rub-off on the stock markets and a possible weakening of the euro, which will result in improved competitiveness for European businesses,” Pedersen said to Jyllands-Posten.

Jes Asmussen, a lead economist at Handelsbanken, didn’t think that the ECB move would change much.

“The problem for the Eurozone is not so much the ECB’s lending rate levels, but that a clear divide between north and south has emerged,” Asmussen told Jyllands-Posten. “Interest rate reductions will likely not ease financial overheads for the companies and consumers who need it the most.”

Later on Thursday, and effective as of today, the national central bank, Danmarks Nationalbank, followed ECB’s lead and reduced lending rates by 0.10 percent. Interest rate on certificates of deposit, the current account rate and the discount rate remained unchanged.

The ECB has lowered interest rates a number of times in recent years to combat the economic crisis and it last cut rates in July 2012, when they were lowered to 0.75 percent.