Europe’s rate cut threatens UK exports
THE European Central Bank took the unprecedented step of cutting one of its key interest rates below zero last week. So were Continental homeowners cheering at the thought of being paid to borrow money?
Well no. The cut to minus 0.1 per cent was on the central bank’s deposit rate – what it pays to commercial banks that leave money at the ECB. The negative rate means they will now have to pay to deposit money. The core rate to which many eurozone mortgages are tied was also cut but stays fractionally above zero.
It might seem like this has little significance for Britain, but the dramatic move by the ECB poses risk for the recovery and some small benefit to British tourists abroad. With rates in Europe falling and those in Britain set to rise, there is every chance the pound will increase in value against the euro.
Your holiday pound will go further on the Continent. But a rising pound will mean British exports become more expensive.
Exports have so far been one of the weaker aspects of the recovery and the need to boost them is likely to be emphasised at this week’s International Festival for Business in Liverpool. But against a weakening euro the task will get harder.
Last week, Asos blamed exchange rates for much of its difficulties. The online fashion group, one of the darlings of the new dotcom era, saw £1.5billion wiped from its stock market value.
The slumping euro will make many of us feel richer as we holiday on the Continent this summer, but it is also a significant danger to our economic recovery.
Whatever our views about political and economic links with the EU, in terms of business our fates are already entwined.