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Mixed Reaction to ECB Rate Cut

By Premier Pension Solutions SL - Sat 11th May 2013

The European Central Bank (ECB) has cut interest rates by 0.25% to a record low of 0.5%. The cut was widely expected but it was comments surrounding the ECBs deposit rate which was of greater interest to the market. This is the rate that the ECB pays on excess liquidity deposits that commercial banks have with the ECB on a daily basis. This rate is zero, and has been since last summer.

President of the ECB, Mario Draghi, tried to give some reassuring comments about standing ready to act further but also said that he had an open mind about imposing negative deposit rates where banks would have to pay to deposit overnight money. It was this that triggered a 1.5% fall in the value of the Euro against the USD and saw the German government 10-year bond yield fall to a record low of 1.16%.

It is unsettling news for eurozone banks in particular as it erodes their profitability at a time when they are under considerable pressure to improve their balance sheets.