The European Central Bank Reduced Benchmark Down to 1.00% besides the Lending Rates Down to 1.75%...

The verdict is out, the European Central Bank decided to reduce their benchmark today to 1.00% to record a historic low and to surprise markets the central bank approved the use of non-standard measure after they thought for some time that Trichet did not approve to extend measures further. In addition, the bank reduced the lending rates down to 1.75% from the previous 2.25% just to inject more liquidity in markets.

This is the seventh time the bank decides to reduce the benchmark since the Credit Crisis intensified. The start was with the emergency rate cuts and then the series continued as growth contracted deeply and recession dampened in the euro area. Taking rates from the seven years high of 4.25% to the current historic lows to 1.00% in a short period was shocking, as this cleared out to what extent the zone has been struggling with the spillover from the US sub-prime mortgages.

However, this reduction will help reducing the protracted constraints on the economy where banks now can start borrowing money from the Central Bank in order to ease down any credit squeeze they face. It’s amazing how Trichet had used the lending rates as a key instrument in easing the crunch in his economy instead of jumping to use unconventional methods that would results in severe consequences in the economy.

After forty-five minutes, Trichet came out to say, “We will conduct liquidity providing long-term operations with a maturity of 12 months. The operations will be conducted at fixed rate tenders at full allotment”, in addition to purchasing euro dominated bonds.

Nevertheless, most recently the economical fundamentals in the zone had signaled clearly that an improvement in the zone is taking place. Its obvious that we finally had reached to the bottom of recession and turning points is taking place, yet still a recovery won't be seen anytime soon until we finish from the aftermath of the credit crunch on the real economy such as the Unemployment rates.

The Unemployment rates surged in March to 8.9% the highest in three years affected by the stalling manufacturing and services sectors after their profits got eroded badly resulting in terminating jobs in order to reduce down their expenses. According to projections, the levels of Unemployment rates will escalate further until the end of the year because sectors were to see profits in order to stop those actions.

Trichet added further that the current interest rates did not reach the lowest, opening the path for more rate reductions if the economy did not recover even after the endless interventions.

Therefore, 60 billion euro’s will be subject to purchase of euro dominated bonds, as this step would bolster the infrastructure of the zone in order to shore up growth and get back on the right track of recovery.

In conclusion, the European Central Bank took four steps today, reducing the benchmark down to 1.0%, devoted 60 billion euro dominated bonds purchases, reducing the lending rates down to 1.75% from 2.25% and holding the deposit rates 0.25%.

Even when those actions cleared out that economy is struggling with a severe dilemma but optimism would spread in markets because a recovery is for sure now…

Ecpulse

disclaimer: The content of ecPulse.com and any page in the website contain information for investors/traders and is not a recommendation to buy or sell currencies, stocks, gold, silver & energies, nor an offer to buy or sell currencies, stocks, gold, silver & energies. The information provided reflects the writers' opinions that deemed reliable but is not guaranteed as to accuracy or completeness. ecPulse is not liable for any losses or damages, monetary or otherwise that result. I recommend that anyone trades currencies, stocks, gold, silver & energies should do so with caution and consult with a broker before doing so. Prior performance may not be indicative of future performance. Currencies, stocks gold, silver &energies presented should be considered speculative with a high degree of volatility and risk