Is imminent ECB rate cut on the cards?

Posted By: Religare
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Is imminent ECB rate cut on the cards?
With European policymakers unable to overcome their political differences and stalk out a solution to the region's deepening debt turmoil, markets are riding their hopes high on the European Central Bank to undertake further policy easing action to help revive the struggling Euro area economy.

The European Central Bank (ECB) on Friday relaxed some terms for collateral for banks to spur loan growth in the region and support Europe's fight against the two and a half year old debt contagion.

After injecting a record 1 trillion euro through its long-term refinancing operations, the ECB has been sitting on the sidelines for some weeks.

However, the central bank may be pressed into action amid the deepening economic downturn in the Euro area.

Manufacturing activity in the debt saddled Euro area shrank at the fastest pace in three years in June 2012 as the region's deepening debt turmoil squeezed demand, underscoring the economic gloom plaguing the 17-member economy.

Soaring unemployment and a severe austerity drive is squeezing household finances and crimping consumer spending in the region. Slowing inflation also gives the ECB more room to undertake further policy easing.

With the central bank's record liquidity injections failing to spur loan growth, speculation is rife that the central bank, at its next meeting in July, may lower interest rates, which are already at a record low.

With banks already flooded with cheap money, a cut in the ECB deposit rate may force banks to lend to customers who are prepared to pay a higher rate than the ECB, thereby spurring loan growth. European banks have been reluctant to lend on open markets, instead choosing to park surplus cash with the ECB.

Read more about: ecb
Story first published: Monday, June 25, 2012, 23:32 [IST]
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