Today, the European Central Bank cut its interest rate by quarter of a percent to 1% while also unveiling the plan of further quantitative easing with the plan of buying 60 billion euro ($80.5 billion) worth of covered bonds. The 1% rate set is the lowest in the 16-nation Union’s history and some officials are saying the rate should stay there. The ECB also decided to extend 12-month credits to banks in order to bring more money flowing in the system. The plans come as a result of the negative sentiment that remains in the region.
“The latest economic data suggest tentative signs of stabilization at very low levels after a first quarter that was significantly weaker than expected,” Trichet said. “Overall, economic activity is likely to remain very weak for the reminder of the year before gradually recovering in 2010.”
A bit on covered bonds:
Covered bonds, known as Pfandbriefe in Germany, are secured by property loans or lending to public-sector institutions. They differ from mortgage-backed securities because they’re also supported by a borrower’s pledge to pay. They have traditionally been considered among the safest corporate bonds available, allowing lenders to pay less interest.
Meanwhile, Bank of England refused a further cut of its .50% rate as the BoE Monetary Policy Committee (MPC) fears that the damage to banks’ profitability of such a low rate would “outweigh any stimulus they would give to the economy.” However, just like the ECB, BoE similarly announced plans of buying more bonds in the amount of £50 billion ($75.71 billion), now bringing the total to £125 billion. While many analysts expected the Bank to pursue this strategy, they did not expect for it to be pursued so soon.