ECB cut interest rate to combat recession

On 6th May, ECB announced it would lower interest rate to a new record 1% and consider other measures to combat recession and stimulate growth.

The Bloomberg reported that it was likely ECB would cut the interest rate to less than 1% and buy debt to pump money into the economy. The entire attitude towards the situation in Europe was negative, but positive towards interest rate cut. It was reported “The euro area is clearly experiencing a deep recession and it is hard to see how the region can avoid something that looks a lot like deflation. The ECB should be putting in place the most accommodative policy stance possible, and leaving it in place for an extended period of time.”

The Wall Street Journal’s attitude towards interest rate cut was neutral. It supported the practice, but on the other hand it thought not that necessary. The judgment was based on the performance of other countries such as USA, UK. It was reported that "Euro-zone markets are benefiting from the Fed and BOE asset-purchase programs to a good degree, with German government bond yields remaining capped and spreads tightening.” So even if the interest rate stays the same, the economy will still benefit.

The Financial Times seems worried about the economy in Euro Zone and thought interest rate cut was urgent. It is reported “Compared with UK, the performance of Europe in the first quarter had been very bad, although there had been “tentative signs” of stabilization.”

The Chinese financial media seems not happy with ECB’s practice and the attitude is negative. China doesn't like quantitative easing as it believing printing money to reflate the economy is unfair to the residents. What’s more, lower the interest rate will lead to a drop of exchange rate, which is the worst thing China wants to see. Because it will hurt Chinese export again.

In my opinion, cutting the interest rate is inevitable, all financial figures showed the needs of stimulating the economy.

Deflation threat
The 16-nation economy will shrink 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K. U.S’s current interest rate 0.25%, and UK is 0.5%, so Europe has the room to cut the interest rate. Besides, according to the EURO LIBOR rate overnight, a little higher than 1% showing the financial credit was running well and the economy was beneficial from it.

Inflation rate
Now the inflation rate in Euro Zone is 0.6%, it gives room for quantitative easing. ECB also said they would spend $80 billion Dollars in covered bonds. So the companies will get more money and can avoid some healthy companies face bankruptcy because of capital strain in short run.

In conclusion, I believe it is a right call, and an effectual way the central bank can do to stimulate economy. And the Europe will recovery step by step.