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Ecb Cuts Benchmark Rate To 0.25%

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http://www.bbc.co.uk/news/business-24851483

The European Central Bank (ECB) has cut its benchmark interest rate to new record low of 0.25%, down from 0.5%.

The move came as a surprise to many analysts.

Recent concerns over low inflation and the weakness of the eurozone economy had led many to suggest that further action from the ECB may be needed, but not until later in the year.

Inflation in the eurozone fell to 0.7% in October - its lowest level since January 2010.

Prices in Greece - one of the eurozone members worst hit by the economic crisis - have not risen since July. Some economists are also worried about deflation in Spain.

The ECB's target is to keep inflation just below 2% - seen as a healthy level for economic growth.

'Weak economic activity'

"Deflationary risks and the stronger euro seem to have motivated the ECB's move," said Carsten Brzeski, an analyst at ING.

"It is obvious that the ECB under president [Mario] Draghi has become much more pro-active than under any of his predecessors."

Speaking at a press conference after the announcement of the cut, Mr Draghi said the bank expected to see "a prolonged period of low inflation", and said the eurozone was seeing "weaker than expected economic activity".

"Accordingly, our stance will remain accommodative as long as necessary," he said.

He reiterated a pledge to keep rates low for the foreseeable future as part of the bank's new policy of offering forward guidance alongside its decisions.

Rates had been held at 0.5% since May, and before that were cut to 0.75% in July 2012.

The cut in the benchmark rate is designed to make it cheaper for banks to borrow from the ECB, with the aim that this will be passed on to businesses taking out loans, boosting the economy.

The euro fell sharply against the dollar in response to the decision, dropping more than 1%.

A weaker euro may be a help to the eurozone economy by making European goods cheaper abroad, benefiting exporters.

Edited by cool_hand

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Prices in Greece - one of the eurozone members worst hit by the economic crisis - have not risen since July.

Oh my GOD!!!

Prices have not risen for a few months. Panic now. :o

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The Irish Times got in a quick implications article:

Mortgage holders to save hundreds as ECB cuts rates

:rolleyes:

Meanwhile, the FT says this:

With good reason the ECB can now claim that it is a bank not only independent of political pressures, but independent of the post-second world war obsession with inflation of the Bundesbank.

Well, that's nice then. The Eurozone is clearly back in party mode now with the ECB spiking the punch bowl.

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The Irish Times got in a quick implications article:

Mortgage holders to save hundreds as ECB cuts rates

:rolleyes:

Meanwhile, the FT says this:

Well, that's nice then. The Eurozone is clearly back in party mode now with the ECB spiking the punch bowl.

But how many are on tracker rather than SVR?

Apparently else where in Europe it has been much more popular than the UK to keep the SVR elevated to compensate the banks for the loss making trackers.

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The Irish Times got in a quick implications article:

Mortgage holders to save hundreds as ECB cuts rates

:rolleyes:

Meanwhile, the FT says this:

Well, that's nice then. The Eurozone is clearly back in party mode now with the ECB spiking the punch bowl.

I hardly think that the Eurozone situation can be described as "party mode" at the moment.

Cutting the rate maybe is the right thing to do,. but it will of course be largely ineffectual.

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This claims to be a transcript of Draghi's explanatory statement.

The following snippets stood out for me regarding energy prices (recall how the UK big six all say 'wholesale prices' are going up):

In addition, real incomes have benefited recently from generally lower energy price inflation.
According to Eurostat’s flash estimate, euro area annual HICP inflation decreased in October 2013 to 0.7%, from 1.1% in September. This decline was stronger than expected and reflected, in particular, lower food price inflation, a larger fall in energy prices and some weakening in services price inflation. On the basis of current futures prices for energy, annual inflation rates are expected to remain at low levels in the coming months.

hmmm....

Ten percent rise in UK energy bills fully justified then.

EDIT: Overall energy price deflation across the eurozone, but Greece is seeing significant inflation (+7.7)

HICP

Edited by Quicken

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I hardly think that the Eurozone situation can be described as "party mode" at the moment.

Cutting the rate maybe is the right thing to do,. but it will of course be largely ineffectual.

Existing tracker mortgages will see a few quid a month saving, but many here are in arrears and not paying anyway! Won't make any difference for them.

SVR's will not budge as banks are making a loss, so if anything banks will make slightly less of a loss __assuming__ that people are willing to lend to the banks at a lower rate.

Suppose the EBC needs to look like it's doing something.

I will keep my eve on the SVR and fixed mortgage rates as we are viewing a house on Saturday - first time in 6 months after we were gazumped.

The property market here (outside Dublin) is much much quieter than last year and some properties I knoiw would have been 'snapped up' last year have been on the market for 6 months now.

[rant on]I am not sure that getting a fixed mortgage is any benefit in Ireland because if you default on your mortgage (interest rates shoot up) noting happens anyway so in effect their protection is worthless. [/rant off].

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The 1% need inflation to keep the wealth transfer going, that is why deflation or in this case low inflation of 0.7% (ie prices are still going up but not by much) is a disaster.

I was quite chuffed that my wages inflation outpaced both rent, food and fuel costs this year for the first time since.... erm??

I think HMS Euro is too big to turn around with a 0.25% rate cut, funding for lending UK style would do some serious inflation, not so sure the Germans would like that though..

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I was quite chuffed that my wages inflation outpaced both rent, food and fuel costs this year for the first time since.... erm??

I think HMS Euro is too big to turn around with a 0.25% rate cut, funding for lending UK style would do some serious inflation, not so sure the Germans would like that though..

I'm struggling to see where all the inflation is going to come from in the UK.

The only conclusion I can draw is that it will come from expansion of debt/reduction of savings. Because as far as I can tell there is very little wage inflation.

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Terrible news, I can see why it's causing a problem.

....no not a problem, a chance to take a nice cheap holiday in Europe....they would welcome the extra money/employment I am sure, or you could even invest in a nice cheap property, they have fallen greatly in recent years, good for the young Europeans also. ;)

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When is the penny going to drop that it is only a matter of time before europe has zirp rates and QE.

It might not be called QE, but QE it will be.

Euro market spivs want the sugar rush to equities as well. It is mad, but inevitable.

..._

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I was quite chuffed that my wages inflation outpaced both rent, food and fuel costs this year for the first time since.... erm??

I think HMS Euro is too big to turn around with a 0.25% rate cut, funding for lending UK style would do some serious inflation, not so sure the Germans would like that though..

The issue is a fisher debt deflation trap which the southern euro economies are stuck in.

Their economies are continually cycling down. The evidence on this is pretty clear. They need to reflate to stimulate economic activity to break that cycle.

You personally maybe ok (for now), especially if you hold no debt. But eventually as everything else collapses around you, you will end up being not ok. Every greek is learning that lesson.

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Well QE has worked in UK, we have a soaring stock market, 3% inflation, rising house prices, GDP growth and massive levels of personal debt so Europe must learn from our example and print like there is no tomorrow ... what could possibly go wrong?

The UK is a mess I agree. The money printing should have gone to finance real economic activity, making use of the vast numbers of unemployed and underemployed rather than into financial games. That way there would have been no inflation or asset bubbles. But even in spite of this which would you rather have, the position the UK is in or the position greece and spain are in?

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Well QE has worked in UK, we have a soaring stock market, 3% inflation, rising house prices, GDP growth and massive levels of personal debt so Europe must learn from our example and print like there is no tomorrow ... what could possibly go wrong?

That they don't print enough like Japan?

Abenomics now....

After years of deflation, prices are starting to rise. Consumer prices increased 0.8 percent in August from a year earlier, the fastest pace since November 2008. Inflation could rise 2.8 percent in the 2014 fiscal year beginning April 1 because of the sales tax increase.

MOS Food Services (8153:JP) said in September it would raise the price of hamburgers at its restaurants for the first time in five years. Yakult Honsha (2267:JP), a maker of fermented milk products, announced in the same month it would replace one of its drinks with a version that costs 14 percent more—its first price increase in 22 years. In August, Sake maker Nihonsakari raised prices for the first time in 19 years for its version of the national tipple.

http://www.businessweek.com/articles/2013-10-24/abenomics-could-widen-japans-income-gap

Saving is even starting to go out of fashion in Japan

Japanese Households Without Savings Climb to Highest Since ’63

The share of Japanese households with no financial assets rose to a record as falling incomes forced people to dig into their savings, highlighting the potential for widening disparities under Abenomics.

http://www.bloomberg.com/news/2013-11-07/japanese-households-without-savings-climb-to-highest-since-63.html

Japan have a bit of room to get their house prices up. Back to 1983 values when this was written....

japanese-home-prices.png

http://www.doctorhousingbubble.com/japan-real-estate-bubble-home-prices-back-30-years-zero-percent-mortgage-rates/

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The UK is a mess I agree. The money printing should have gone to finance real economic activity, making use of the vast numbers of unemployed and underemployed rather than into financial games. That way there would have been no inflation or asset bubbles. But even in spite of this which would you rather have, the position the UK is in or the position greece and spain are in?

Either one, given that their official debt-to-GDP is approx 1/2 that of the UK.

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That they don't print enough like Japan?

Abenomics now....

Saving is even starting to go out of fashion in Japan

Japan have a bit of room to get their house prices up. Back to 1983 values when this was written....

http://www.doctorhou...mortgage-rates/

The Japanese are just pulling forward discretionary spending ahead of the consumption tax hike next year. Spending will slump again after April 1st. Meanwhile Abenomics has killed the govt debt market and is hollowing out the manufacturing landscape at a furious rate.

Japan-Trade-Balance-2011-2012-2013.png

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Joking aside,things must be quite bad under the surface.

Yup. Germany's still in the Euro and the austerity nutters still think they're morally correct.

Insanity.

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Yup. Germany's still in the Euro and the austerity nutters still think they're morally correct.

Insanity.

They will be arguing for more austerity now - austerity for the masses and increased wealth for the 1%. Europe repeating the mistakes of the past.

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The Japanese are just pulling forward discretionary spending ahead of the consumption tax hike next year. Spending will slump again after April 1st. Meanwhile Abenomics has killed the govt debt market and is hollowing out the manufacturing landscape at a furious rate.

Japan-Trade-Balance-2011-2012-2013.png

Err.....no.

The reason Japans trade balance has gone negative has absolutely nothing to do with abenomics.

Rather Japan has turned off its nuclear industry pretty much completely which means it has to import fossil fuels to generate electricity.....and also has to pay for it.......

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The issue is a fisher debt deflation trap which the southern euro economies are stuck in.

Their economies are continually cycling down. The evidence on this is pretty clear. They need to reflate to stimulate economic activity to break that cycle.

You personally maybe ok (for now), especially if you hold no debt. But eventually as everything else collapses around you, you will end up being not ok. Every greek is learning that lesson.

I could say the same for the UK where every year the chance of living in decent accommodation gets worse as property prices and rent get more expensive. Wage inflation is low and energy and food get more expensive.

If things get too bad and widespread rioting and looting get too bad I can always drive north with everyone else. Personally I donot belive in these doomsday scenarios and anti Euro propaganda that the UK has been brainwashed with.

Low and stable prices are far better than rocketing cost inflation with stagnant wages.

Pumping cost inflation Japan and UK style is certainly not better than a little deflation.

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