Policy makers of the European Central Bank may cut interest rates to 10%
Last month the interest rate of the European Central Bank fell to a record low of 0.25%. Now the bank's management is faced with the need to further stimulate the economy, CNN Money reports.
Experts still are not sure if the president of the bank, Mario Draghi, expects positive economic reports that are projected to be published in March, or will start to save the economy today.
Here are the main problems which the ECB is facing:
1. The risk of deflation
There is a downward trend in inflation in the euro area. Today the figure is 0.7 %, far below the target level (2%). This situation is dangerous in deflation and economic stagnation that has just started to recover after protracted crisis and continues to struggle with unemployment.
2. Shaky growth prospects
Analysts have argued that this year the global economy should be accelerated due to recovery in developed countries. But recent data from the U.S. and Europe forced to reconsider forecasts.
This week reduced the level of industrial activity in the U.S. and in Europe decreased volume of retail sales in figures for December 2013. In addition, the growth of the Chinese economy has slowed and decreased the amount of money that the U.S. Federal Reserve is pouring into the American economy.
3. Market volatility
Recently, investors have lost interest in risky transactions in the stock markets. The level of variability in prices of financial instruments is quite high. It makes depositors more cautious in attitude to investment. For example, U.S. Treasury bonds and German government bonds today brings much less profit than a month ago.
European banks are in the process of rehabilitation after the crisis. The long period of market volatility may force them to reduce the volume of lending to households and businesses. Through a process of economic recovery may be delayed.
To stabilize the economy, the ECB may continue to cut interest rates to 0.10 %. Regulator can also buy packages of bank loans issued to private firms.
President of the Bank, Mario Draghi said that the program is to stimulate the economy through the purchase of financial assets and will not be introduced in the EU due to non-compliance with legal requirements.
