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ECB tipped to cut interest rates

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With confirmation that the eurozone economy contracted at the end of 2011, investors, consumers and businesses will be keeping a keen eye on how policymakers respond in order to drive growth across the continent.

This could be critical if they want to ensure companies invest in the region and continue to transfer money across Europe and around the world.

Some are predicting that the European Central Bank will try to get the economy moving by reducing interest rates. While they currently stand at one per cent, IHS Global Insight believes they could soon be slashed to 0.75 per cent.

"Despite some recent improved eurozone surveys and evidence that Germany is returning to growth, we doubt that the eurozone will be able to avoid further contraction in the first quarter and very possibly the second," said Howard Archer, chief European economist at the group.

The continuing debt crisis in the region was blamed partly for this turn of events, as it is impacting on confidence and fuelling uncertainty. Mr Archer said this is in turn putting many companies off investing in the eurozone, which could affect the number of business money transfers in the area.

Mr Archer noted that credit conditions are getting much tighter across Europe, as are the fiscal policies in a number of countries.

He added that growth is also being inhibited by the fact consumers are finding themselves under increasing financial pressure, as their spending power is being squeezed and many are struggling in the face of rising unemployment.

As a result, Mr Archer believes cutting interest rates could be the ECB's best option in the current climate.

According to figures from Eurostat, gross domestic product in the eurozone slumped by 0.3 per cent between October and December 2011. Germany, France and Italy were among the countries to see a drop in economic output in the final quarter of the year.

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