European debt crisis: Difference between revisions - Wikipedia

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With the aim of boosting the recovery in the eurozone economy by lowering interest rates for businesses, the ECB cut its [[bank rate]]s in multiple steps in 2012–2013, reaching an historic low of 0.25% in November 2013. The lowered borrowing rates have also caused the euro to fall in relation to other currencies, which is hoped will boost exports from the eurozone and further aid the recovery.<ref name="ecb-25"/>

With inflation falling to 0.5% in May 2014, the ECB again took measures to stimulate the eurozone economy which grew at just 0.2% during the first quarter of 2014. (Deflation or very low inflation incentivisesencourages holding cash, causing a decrease in purchases.) On 5 June, the central bank cut the prime interest rate to 0.15%, and set the deposit rate at -0.10%.<ref name=newground>{{cite news|title=European Central Bank Breaks New Ground to Press Growth|date=5 June 2014|url=http://www.nytimes.com/2014/06/06/business/international/european-central-bank-cuts-interest-rate.html|accessdate=5 June 2014|work=New York Times|author=Jack Ewing|author2=Neil Irwin}}</ref> The latter move in particular was seen as "a bold and unusual move", as a negative interest rate had never been tried on a wide-scale before.<ref name=imposes>{{cite news|url=http://www.bbc.com/news/business-27717594|accessdate=5 June 2014|title=ECB imposes negative interest rate|publisher=BBC|date=5 June 2014}}</ref> Additionally, the ECB announced it would offer long-term four-year loans at the cheap rate (normally the rate is primarily for overnight lending), but only if the borrowing banks met strict conditions designed to ensure the the funds ended up in the hands of businesses instead of, for example, being used to buy low risk government bonds.<ref name=imposes /> Collectively, the moves are aimed at avoiding [[deflation]], and at increasing "real world" lending.<ref name=imposes />

Stock markets reacted strongly to the ECB rate cuts. The German [[DAX]] index, for example, set a record high the day the new rates were announced. Meanwhile, the euro fell to a four month low against the dollar.<ref name=imposes /> However, due to the unprecedented nature of the negative interest rate, the long term effects of the stimulus measures in hard to predict. Bank president [[Mario Draghi]] signaled the central bank was willing to do whatever it takes to turn around the eurozone economies, remarking "Are we finished? The answer is no." He laid the groundwork for large scale bond repurchasing, a controversial idea known as [[quantitative easing]].