Central banks ease borrowing costs

The Bank of England says it will purchase 50 billion pounds of assets with newly created money. Photo / AP
The Bank of England says it will purchase 50 billion pounds of assets with newly created money. Photo / AP

Efforts by central banks in Europe, China and the UK to help bolster their flagging economies by easing the cost of borrowing only served to highlight concerns about the outlook.

As was widely expected, the European Central Bank slashed its key rate by 25 basis points to a record low 0.75 per cent and reduced its deposit rate to zero from 0.25 per cent, while the Bank of England said it would purchase 50 billion pounds (US$78 billion) of assets with newly created money.

However, the decision by the People's Bank of China to ease its rates was the second surprise cut in borrowing costs in a month. The one-year lending rate will fall by 31 basis points to 6 per cent and the one-year deposit rate will drop by 25 basis points to 3 per cent effective tomorrow.

"It is a surprise that they are moving so quickly. It shows that policymakers' concerns about the global economy have only grown," Mark Williams, an economist at Capital Economics in London, told Reuters, referring to Beijing's move.

Indeed, the state of the euro zone economy has deteriorated, according to ECB president Mario Draghi. "We see now a weakening basically of growth in the whole of the euro area, including the country or the countries that had not experienced that before," he said.

Europe's Stoxx 600 Index ended the day with a 0.2 per cent decline from the previous session.

The euro dropped 1.1 per cent to US$1.2388 at 3.01pm in New York, while the US Dollar Index, a gauge of the greenback against six major counterparts, advanced nearly 1.3 per cent for its biggest climb of 2012, according to Bloomberg.

In late trading in New York, the Dow Jones Industrial Average barely budged, last up 0.02 per cent, while the Nasdaq Composite Index rose 0.25 per cent. The Standard & Poor's 500 Index was 0.20 per cent lower.

"The genesis of the economic decline we're seeing is Europe. It is spilling everywhere," Stephen Massocca, managing director at Wedbush Morgan in San Francisco, told Reuters.

"The market's main focus continues unchanged and that is going to be the European debt crisis. I still think that is going to be the big news story that will have the greatest impact on stock movements."

Ahead of key US monthly employment data due tomorrow, today's reports offered a few brighter-than-expected spots.

Applications for jobless benefits dropped 14,000 in the week ended June 30 to 374,000, Labor Department figures showed. Private employers increased payrolls by 176,000 last month, according to ADP Employer Services data.

"While tomorrow's employment numbers may not be great, it is beginning to look like the labour market is not nearly as weak as feared," Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania, told Reuters.

- BusinessDesk

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