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  • 2024-06-02

ECB's Major Policy Shift: Impact on Us

I. European Central Bank Announces Interest Rate Cut

Tonight, at the monetary policy meeting held in Slovenia, the European Central Bank (ECB) announced that the three main European interest rates will be reduced by 25 basis points, or 0.25%, and this change will take effect on October 23rd.

The decision to cut interest rates was somewhat unexpected, as even in September, the market did not anticipate such a move. Moreover, this is the third time the ECB has cut interest rates this year, but a reduction of 25 basis points is still considered moderate.

There are many reasons for the rate cut, but I believe the two most significant are: first, Europe's economy, like those of other regions around the world, is facing issues and is in a downcycle; second, the recent rapid decline in European inflation has led to a sharp decrease in the upward pressure on inflation caused by interest rate cuts. Therefore, Europe will focus on promoting economic growth in the coming period.

As soon as the news of the interest rate cut was released, stock markets across Europe responded with significant gains.

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II. Impact of the Interest Rate Cut on Europe

As a significant global economy, the Eurozone's continued interest rate cuts could have a substantial impact on both the European and global economies.

1. Stimulating Economic Growth. Lower interest rates mean reduced borrowing costs, whether for personal loans or corporate loans. This makes individuals and companies more willing to borrow money to make purchases or invest, thereby driving economic progress. With slow economic growth in the Eurozone, interest rate cuts can help stimulate the economy and strengthen investment confidence.2. Increase inflation. While lowering interest rates can make borrowing easier, it may also make things more expensive. Because money is easier to borrow, there is more money in the market, which could lead to inflation, or an increase in prices. The current inflation rate in the Eurozone has gradually fallen close to the 2% inflation target set by the European Central Bank, and the market has fully anticipated the continuous improvement in price levels. Therefore, the impact of a single interest rate cut on future inflation is limited, which is also the reason why Europe dares to cut interest rates multiple times.

3. Impact on exchange rates. Due to the reduction in interest rates, the Euro becomes less attractive to international capital, leading to a devaluation of the Euro, making it less valuable compared to other currencies. This is beneficial for exporters because their products become cheaper in the international market, making them easier to sell.

4. Impact on regions outside of Europe. As one of the world's major economies, adjustments to the monetary policy of the Eurozone may have spillover effects on the global financial market. Lowering interest rates could lead to some European capital flowing into emerging market countries.

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