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May 24th 2005

ECB to lower interest rates?

At 2%, the official EU interest rate is one of the lowest among developed nations. The European Central Bank (ECB) has been been asked to use momentary policy as a means for boosting growth in the struggling Euro-zone. In fact, several prominent members of the EU are calling for the ECB to lower interest rates. The ECB has refused to consider this as an option, arguing that it would likely do more harm than good. The ECB has cited wide macroeconomic disparities throughout the EU as one of the key reasons it will not adjust interest rates. The ECB is unable to cater to individual nations’ economies; rather, it must set policy based on the performance of the aggregate EU economy. There are currently significant differentials in growth and inflation throughout the EU. Germany, for example, is struggling with lackluster growth and high unemployment, and is lobbying for interest rates to be lowered. Spain, on the other hand, is growing at a healthy clip. Low interest rates are boosting demand and prices to unhealthy levels. Reuters reports:

But what is different, and is cause for concern, is that the inflation rate divergence in the euro zone is persistent. [ECB president] Trichet said national governments could help close the gap by introducing structural reforms, which would also boost growth and create jobs.

Read More: ECB rate cut would only harm euro zone

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Posted by Adam Kritzer | in Euro | No Comments »

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