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April 2, 2009    

ECB may cut rates to record low and implement quantitative easing

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by Kay Murchie

There are concerns for the recession-hit euro zone economy as it heads towards deflation.

In order to fight off a prolonged recession, the European Central Bank (ECB) is expected to cut interest rates to a record low of 1%.

In October last year, rates for the euro zone area hit 4.25% and currently stand at 1.5% - the lowest since it started setting rates in January 1999.

Meanwhile, economists believe the ECB may introduce quantitative easing (also known as printing money) - a process whereby funds are injected into the financial system to ease pressure on banks by giving them extra capital.

The process has already been introduced by both the Bank of England and the US Federal Reserve, as they endeavour to stave off a prolonged recession.

However, the ECB has so far rejected this option but further details of the euro zone’s plans for the economy will be set out in a press conference in Frankfurt later today.

Howard Archer of IHS Global Insight is forecasting that the euro zone economy will contract by 4% this year. Mr Archer said “there is a very real and growing risk” that the recession could spread into next year.

Meanwhile, inflation in the euro zone has fallen to 0.6% compared with its medium-term target of “close to but below” 2%. Many believe the economy could enter a period of deflation (where prices fall rather than increase). This could be a serious threat to the economy because it deters consumers and businesses from spending in expectation of falling prices.

Finally, the unemployment rate in the euro zone reached 8.5% in February - its highest level in nearly 3 years.

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