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European Central Bank drops rates

By Marcie Geffner ·
Wednesday, July 11, 2012
Posted: 11 am ET

U.S. consumers who think interest rates are too low might have some new company in Europe now that the European Central Bank, or ECB, has chopped a key bank interest rate. It went from 1 percent to 0.75 percent, a record low, and the bank also cut a deposit rate from 0.25 percent to -- this is not a typo -- zero percent.

The ECB is the central bank for the euro, the common currency used in the 17 European countries that make up the so-called eurozone, according to the ECB website. The euro was introduced in 1999.

The ECB operates somewhat like the Federal Reserve in the U.S., except that the Fed balances employment growth and low inflation while fighting inflation is the undisputed top priority at the ECB, according to a New York Times summary of the European bank's charter.

The Fed, ECB and other central banks sometimes work together to influence the global economy through coordinated monetary policy actions, such as interest rate cuts.

The latest ECB rate cut comes at a time of low inflation and slow economic growth in a number of European countries, according to news reports.

After the ECB rate cut, at least three major investment brokerage companies, JPMorgan Chase, BlackRock and Goldman Sachs, closed certain European money market funds to new investors, according to Reuters. Investment advisers told the news service the low rates meant funds couldn't operate in a way that would cover expenses and earn enough of a return to investors, who already have few options to park cash.

A commentary in The Economist magazine suggested the ECB rate cut would "help banks in the ailing economies of southern Europe" in part because it will affect the rate they pay on loans they received from the ECB itself.

But the magazine also warned that the rate cut wouldn't be enough to reverse the economic malaise on the Continent.

"What Europe really needs is a much stronger fiscal and political underpinning to buttress what will otherwise remain a rickety monetary union," The Economist said. "A concert of central banks can help, but what is needed is a concert of European states."

Follow me on Twitter: @marciegeff.

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