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Monetary Tightening Ends in Europe

Monetary tightening ends in Europe. The European central bank reinforced its position that more interest rate increases were now excluded, causing the euro to drop. “Uncertainty is particularly strong”, said Jean Claude Trichet, yesterday, after announcing that the rate will remain at 1.5%. ECB’s refinancing rate stays at 1.5% and the bank keeps the deposit facility rate at 0.75%. ECB also revised its assessment of growth and now gives more weight to risks.

The Bank lowered its inflation forecast for 2012 to between 1.2% and 2.2% as inflation risk wane and the growth forecasts in euro zone worsens, but it did not change the previous forecast for 2011 which was between 2.5% and 2.7%. The ECB also revised down its growth forecast. It expects a growth rate between 1.4% and 1.8% in 2011 (previous forecast was between 1.5% and 2.3%).The bank also cut its growth forecast for 2012 to a range between 0.4% and 2.2%. Jean Claude Trichet said they are ready to do whatever is necessary while emphasizing the uncertainty about the global economy.

The reaction to Jean Claude Trichet’s speech: the euro fell against all major currencies except the Swiss franc.

The ECB raised interest rates in April and July 2011 to fight against inflation threat. However, the European debt crisis spread, the confidence waned and on the hike of borrowing costs, many economists such as Stiglitz and Nouriel Roubini urged the bank to reduce the rates.

Also, the bank of England kept its interest rate unchanged at 0.5%. So, it seems like monetary tightening ended in Europe.

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