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"Following the terrorist attacks on the US, uncertainty about the US and the world economy has increased," according to an ECB press release. The institution says this rate cut, which comes less than three weeks after the latest reduction decision for the Euro zone (see article in European Report 2614), "was decided in concert" with the FED during a special meeting (teleconference) of its Governing Council. It was announced exactly three hours after the decision awaited from the FED.The Federal Reserve has cut its rates three times since the start of the year. This unprecedented action by the institutions, which have often been at loggerheads over monetary policy in the past, has come as a surprise to most observers.The Refi is the ECB's main tool for credit management in the Euro zone. Banks seeking short-term refinancing from central banks may do so by paying interest on the sums they borrow. Since June 28, this corresponds to a basic submission rate equal to the Refi rate. Merchant banks then reflect this rate in the interest they grant to their own customers. The lower the rates for refinancing operations, the lower the cost of borrowing, which should, theoretically give a boost to the economy. This instrument can be used to slow down demand and prevent overheating leading to inflation. The key money rate is bracketed by a floor rate, at which commercial banks may place money with the ECB for 24 hours, and a ceiling rate, at which the banks can borrow for the same period. These rates are one point higher or lower than the key money rate.Since January 1, 1999, when the Refi rate stood at 3% the ECB has altered its rates 11 times :May 8 1999: cut to 2.50% (Refi)November 4 1999: increase to 3% (RefiFebruary 3 2000: increase to 3.25% (Refi)March 16 2000: increase to 3.50% (Refi)April 27 2000: increase to 3.75% (Refi)June 8 2000: increase to 4.25% (Refi)June 31 2000: increase to 4.50% (Refi)October 5 2000: increase to 4.75% (Refi)May 10 2000 : cut to 4.50% (Refi)August 30 2000: cut to 4.25% (Refi)September 17 2000: cut to 3.75% (Refi)"In the view of the Governing Council, the recent events in the US are likely to weigh adversely on confidence in the Euro area, reducing the short-term outlook for domestic growth, according to the ECB. Nonetheless, against the background of the sound fundamentals of the Euro area, the Bank remains confident that the slowdown in economic growth will be short-lived. The ECB has also agreed that the interest rate on the marginal lending facility will be reduced by 0.50 percentage point to 4.75% and the one on the deposit facility will be reduced by 0.50 percentage point to 2.75%. Commissioner Solbes says the ECB's swift action is a good example "of the Euro zone's ability to react quickly to changing events and to act in concert. "Recession?Other major central banks have followed suit, particularly the Bank of Canada and the Swiss National Bank and most economists are looking to the Bank of England to make its contribution in the coming days. The FED has left the way clear for further reductions by pointing to the continuing risk pressing down on economic activity. This echoes the message given by Euro officials. Most economist are expected to see a recession in the United States and do not rule out it that it may spread by a ricochet effect to the rest of the world. An economy is said to be in recession if it reports negative growth for two quarters in a row. Prior to the World Trade Center tragedy, activity in the United States and Europe was being propped up by consumer spending, but consumer confidence is likely to be badly dented by the terrorist attacks.The Governor of the Bank of France, Jean-Claude Trichet, said in an interview on September 18 the world's stock markets had avoided a crash. He is also confident about the outlook for growth in Europe. He believes the ECB decision is an "expression of confidence in being able to reduce inflationary risks, in the ability of the Euro to achieve balanced growth and in the resilience of the world economy ." He went on to say that no-one "wanted to see a slump in Europe, we have a significant rate of growth and we are in a continuing growth cycle." Pedro Solbes says the attacks launched on the United States on September 11 make the single currency more necessary than ever. It should help to " protect Europe from external shocks."
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Title Annotation:European Central Bank and interest rates
Publication:European Report
Article Type:Brief Article
Geographic Code:4E
Date:Sep 19, 2001

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