The Benchmark Interest Rating

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ECB Lowered Benchmark Interest Rate To 1% At Its December 8 Meeting

The European Central Bank (ECB) lowered its benchmark interest rate by 25 basis points (bps) to 1.00% from 1.25%, as expected, during its Monetary Policy Committee (MPC) Meeting held on December 8, 2011.

The second consecutive cut in rates; following a 25bps cut at the Bank’s November 2011 Meeting. The decision is hinged on the growing need to stimulate the economy amid rising recession fears. Efforts to boost market confidence as the tensions in the banking sector increase amid the worsening debt crisis in the region may have informed the decision. Lower interest rates will be particularly welcomed in countries like Portugal and Italy, where the national debt burden has pushed up interest rates and made it harder for businesses to get loans.

At the Meeting, the ECB took unprecedented steps to expand emergency funding to cash-starved banks. These include the granting of a 3-year loan to banks, compared to the maximum of 1-year facility previously, on the back of a broadened range of securities accepted as collateral. The ECB also eased its requirements for reserves that banks must maintain, which frees up further cash. Plans to continue further quantitative easing in 2012 was also muted at the Meeting.

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