A Look at the Week’s Global Economic Events

In here, we take a look at global economic updates or interesting key developments that investors can take note of. This week’s edition brings me to the European Central Bank’s new wave of measures to stimulate the Eurozone’s economy that was first revealed two weeks ago.

Negative interest rates in Europe

The ECB has become the first major central bank in the world to put in place a bold policy change by reducing interest rates to negative territory. According to a BBC News article, the central bank has cut the deposit rate for banks from 0% to -0.1%. Meanwhile, the benchmark interest rate had also been cut from 0.25% to 0.15%.

As a result of the cut in interest rates, banks will be compelled to lend money to other businesses instead of leaving their cash parked at the ECB. Previously, banks could earn interest by depositing their money with the ECB but with the ECB now charging negative interest rates, banks are charged by the ECB instead of being able to earn interest.

Cheaper long term loans

Besides lowering interest rates, the ECB will also be offering cheap long term loans to commercial banks that are worth up to €400 billion euros (around S$680 billion) until 2018. By providing banks with cheap financing and lots of ammunition, the ECB hopes that money will flow from the banks to businesses and thus help prop up the entire European economic cycle.

Further easing measures

On top of the aforementioned bold measures, the head of Slovenia’s central bank also hinted that further easing measures were in the lineup if necessary. According to the Financial Times, the most likely next option would be large-scale bond purchases, also known as quantitative easing.

Quantitative easing is the same policy used by the United States that was started several years ago and which the US Federal Reserve (the central bank of the country) is in the process of winding down now. There are some who believe that quantitative easing has led the American stock market (and to some extent, the global markets) to rebound along with the country’s economy.

Foolish Takeaway

Simply said, the ECB is utilising all means necessary to tackle the issues of weak inflation and stagnant economic growth in Europe. With the intent to return inflation rates to the 2% level, the ECB has also given guidance that interest rates will be kept low for an extended period until 2016.

With a weaker Euro currency and the full backing of the central bank, it is my opinion that Europe will very likely start on a new path toward growth soon.

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