Europe cuts rates to record low
ECB cuts interest rates from two to 1.5 per cent, the lowest figure since January 1999.
Last month, the bank revealed it had sought government approval for the measure.
Savers hit
Speaking to Al Jazeera, Alistair Heath, editor of CITY-AM, a London financial newspaper, said that the Bank of England’s decision would hit savers and could actually worsen the situation with regard to lending.
Heath said: “The biggest problem is that ultra-low interest rates discourage savers. Until now all the emphasise has been on trying to boost people who borrowed money.
“The problem is when you wipe out savers, as the Bank of England is effectively doing, that discourages people from depositing money in the bank.
“Which means the bank doesn’t have enough resources to lend out, so it’s quite a complex situation”.
‘Stimulate activity’
Philip Shaw, chief economist with Investec, a specialist banking group, said the increase in money supply “should in principle encourage the banks to lend to private sector agents such as households and businesses, stoking monetary growth and stimulating activity”.
But Howard Wheeldon, a senior strategist at brokerage firm BGC International, told Al Jazeera that Europe’s economy is going to go through a “protracted period of lower activity” no matter what European authorities do.
He said high interest rate movements have not solved the economic crisis because the underlying problem remains the lack of available credit.
“Until that is solved, I’m afraid the asset destruction that we have been watching over the last 14 months is not going to end,” Wheeldon said.
The Bank of England has continually cut Britain’s borrowing costs since October last year, when they stood at 5 per cent.
The ECB has been less aggressive in cutting interest rates than the US Federal Reserve and the Bank of England, but still has room to cut rates further later in the year.