European Central Bank holds key interest rate at 1%


By Ken Tysiac

The European Central Bank held its main fixed interest rate at 1% Thursday, deciding not to make a cut that would have sent the rate to an unprecedented low.

The Governing Council of the European Central Bank (ECB) announced that its main refinancing operations rate will remain at 1%. The interest rates on the marginal lending facility and the deposit facility will remain unchanged at 1.75% and 0.25%, respectively.

“This ensures a firm anchoring of inflation expectations in line with our aim of maintaining inflation rates below but close to 2% over the medium term,” ECB President Mario Draghi said during a news conference following the ECB Governing Council’s meeting Thursday in Frankfurt, Germany. “Such anchoring is a prerequisite for monetary policy to make its contribution to supporting economic growth and job creation in the euro area.”

The ECB’s interest rate decision was monitored closely by finance and banking professionals. Lowering interest rates can stimulate lending and growth, but also can lead to inflation and devalued currency.

A recession in Europe would have a negative impact on banks worldwide.

A recent survey of banking industry executives by the Centre for the Study of Financial Innovation showed that bankers from as far away as the United States, Canada, China, Argentina and Australia put macroeconomic risk atop their list of concerns in a fragile economy where Europe’s problems are seen as a possible trigger to a worldwide recession.

The ECB cut its interest rate to 1%  in December, tying a record low. But some key home mortgage rates still rose that month. Lending rates for initial home purchases with terms of more than 10 years increased from 3.93% to 3.95%, and new floating rate mortgages rose from 3.43% to 3.48%, ECB statistics released last week show.

Ken Tysiac (ktysiac@aicpa.org) is a CGMA Magazine senior editor.

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