The European Central Bank has recognised the risks facing the euro zone economy and announced a half point cut in its base interest rates to 2 per cent. It brings interest rates to their lowest levels in half a century and is likely to lead to some modest reduction in borrowing costs here.
For savers, however, the current poor level of returns is set to edge even lower.
There is a strong argument that, given the poor state of the big euro zone economies, the ECB should have cut interest rates sooner and more aggressively. The German economy, in particular, is now dangerously weak and threatened by deflation; it remains to be seen whether the ECB's move can help to revive it. A heavy responsibility also lies with the German political and economic system to push through a structural reform programme essential for long-term recovery.
Such are the dangers facing the euro zone economies that the ECB made it clear yesterday that a further interest rate reduction cannot be ruled out. It is now likely to watch monetary and economic developments over the summer months before deciding whether this is necessary. However unless there are early signs of recovery, particularly in Germany, the ECB should consider a further move sooner rather than later, as it is essential that all possible steps are taken to stop a deflationary spiral taking hold.
For the Republic, lower interest rates will help to cushion the economy somewhat at a time when the international slowdown, rising domestic costs and the increasing value of the euro are all putting a brake on activity. Mortgage borrowers are benefiting from an unprecedented period of low interest rates.
While an increase in borrowing costs is not in prospect in the short term, it is now essential that borrowers do not avail of the current low rates to take loans of a scale that will leave them exposed in future years. This requires a responsible approach from both borrowers and lenders - which has not always been evident in the past - and active regulation by IFRSA, the new regulatory authority for the financial sector.
The ECB's cut and the even lower level of US interest rates highlight the concern of monetary authorities on both sides of the Atlantic about the prospects for economic growth. More optimistic commentators believe that a gradual recovery in the US can help to lift the world economy later this year, but this can be by no means guaranteed. A nervous few months now lie ahead, when we will see whether the medicine of low interest rates can revive the ailing world economy.