Surprise as the European Central Bank cut interest rates to just 0.25%

On Thursday 7th November the European Central Bank cut their base interest rate from 0.5% to 0.25%. The ECB President Mario Draghi has announced that interest rates will remain low for the foreseeable future. Is this interest rate cut a surprise?

In June this year inflation in Europe was 1.6%, their target figure is just under 2%. September has seen the annual rate of inflation fall to just 0.7% and there is now a real fear of deflation and a return of recession in Europe.

In reality it is likely that both Greece and Spain are already experiencing deflation and both France and the Netherlands are on the brink.

France has just had it’s credit rating cut to AA by Standard and Poor, it originally lost it’s AAA rating in 2011. The rating agency’s view is that the French Government are not doing enough to stimulate the economy, to reduce borrowing and improve employment prospects.

It is generally considered that the new President of the ECB, Mario Draghi, is more proactive than previous Presidents and there are some indications that they acknowledge the British approach to dealing with recession has been more successful than in Europe.

So what does the future hold for Europe?

The EU is made up of a misfit of economies and cultures and on paper you really have to wonder if it will ever really work.

Germany is the only really successful economy in Europe. It has managed to absorb East Germany and eventually it’s influence will help it’s closer partners in Western Europe, but some of the fringe economies like Greece may have to be jettisoned on the way.

The time has come for a major rethink of the objectives of the EU. Some policies such as the common agricultural policy are out dated and need a major review. The future of the Euro and the need for common financial policies and controls also need to be revisited. Not least the UK need to be part of this discussion as there is no doubt that the EU will be a better place with Britain fully on board.

You can look at the latest interest rates and read more about the factors that influence bridging rates on our website.