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The ECB cut interest rates from 0.5% to 0.25%, in a move that took some traders by surprise. According to a survey by Bloomberg, only three of the seventy economists they asked predicted an interest rate cut. The move comes only two days after the EU Commission lowered its growth forecast and warned that unemployment in the eurozone will remain high for a few years.
Interest rate cuts can be viewed from two different perspectives. On the one hand, it becomes cheaper to borrow money to invest in equities, and this explains why dealers bought stocks on the back of the announcement. However, looking beyond the next few weeks, this rate decision could be an indication that the eurozone is still struggling, so we could a see a reversal in the coming weeks.
The German market has benefitted most from the ECB decision. The Frankfurt index is up 1.3%, as Germany is relatively well-positioned compared to other countries. Meanwhile, the Italian equity market is up only 0.4%, which suggests Italy’s economy is more in need of stimulus than Germany’s.