Eurozone Monetary Policy


ECB cuts refinancing rate to new record low

At its policy meeting on 5 July, the European Central Bank (ECB) cut the refinancing rate by 25 basis points to 0.75% from 1.00%. The decision, which matched market expectations, represents the first rate cut since December 2011 and brings interest rates to a new record low. In the accompanying statement, monetary authorities noted that indicators for the second quarter of 2012 point to a renewed weakening of economic growth and heightened uncertainty, following on the flat growth recorded in the first three months of the year. While the ECB continues to expect a gradual recovery of the Euro area economy in the longer run, the risks surrounding the economic outlook for the Euro area continue to be on the downside, as the tensions in financial markets due to the deepening of the debt crisis in peripheral Euro area economies spill-over to the real economy. Regarding price developments, the ECB sees inflation moderating throughout the course of the year and falling below 2% in early 2013. In the medium term, upside risks may come from "further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term." However, according to the Bank, risks to the inflation outlook remain currently balanced. Simultaneously, the ECB cut the interest rate on its overnight deposit facility by 25 basis points to zero from 0.25%. The decision aims at stimulating interbank lending, as it reduces the incentive for lenders to park overnight funds at the ECB facility.

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Euro Monetary Policy July 2012

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