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ECB cuts main interest rate to all-time low of 1.25%

Latest update : 2009-04-02

The European Central Bank cut its key interest rate from a current level of 1.50% to an all-time low of 1.25% on Thursday, and it may take "other steps" to deal with a deepening recession.

AFP -The European Central Bank's minimum refinancing rate, which was lowered by 0.25 percentage points to 1.25 percent on Thursday, is the ECB's main instrument for influencing credit and fighting inflation in the eurozone.

The interest rate, which is used during weekly ECB refinancing operations, is the barometer of lending costs in the 16 countries that have adopted Europe's single currency.

Banks that want to refinance their accounts do so by paying interest on the sum borrowed from their respective national central banks.

The rate they pay is based on the ECB's reference rate.

Commercial banks pass on the cost, with a margin, when they grant loans to clients, and as the ECB's benchmark rate decreases, so too, normally, does the rate offered to the public, a situation that fosters economic growth.

On the other hand, when the central bank's rate rises, so does the cost of borrowing money and the demand for credit usually decreases, which helps to curb inflation.

Date created : 2009-04-02