Trying to boost a weak economic recovery and head off deflation, the European Central Bank has cut the cost of borrowing. <br /><br />Bank President Mario Draghi has announced its benchmark interest rate will go down from 0.25 percent to 0.15 percent from June 11. <br /><br />It has also told the region’s commercial banks that they will not get paid any interest when they leave money on deposit with the ECB – indeed they will have to pay to do that though at a relatively low interest rate of 0.1 percent.<br /><br />The hope is the move will persuade the banks to lend more to businesses and individuals.<br /><br />It is the first time the ECB has deployed a negative deposit rate which effectively charges banks to deposit overnight.<br /><br />The move is a response to a slowdown in inflation far below the ECB’s target and to weak euro zone lending.<br /><br />The marginal lending rate – or emergency borrowing rate – was cut to 0.40 percent.<br /><br />The value of the euro against the dollar slipped to a four-month low in response to the ECB’s announcements. <br /><br />The bank is worried the eurozone could get into a spiral of falling prices with slowing growth and consumption as happened in Japan.<br /><br />Its fear is that persistently low inflation and weak bank lending could derail the recovery.<br /><br />“This is a baby rate cut – a tweak to the policy stance,” said RBS economist Richard Barwell, adding that Draghi needed to announce a bundle of measures at his 14.30 CET news conference to avoid disappointing the financial markets.<br /><br />“I think expectations are very high,” Barwell added. “To exceed them, I think he (Draghi) is going to have to talk up the prospect of asset purchases in the near future.”<br /><br />Asset purchases – otherwise known as quantitative easing (QE) – involve the central bank printing money to buy bonds, thereby injecting cash into the economy. <br /><br />with Reuters
