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ECB cuts rate as economic gloom deepens

Jul 05. 2012
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By Andrew McCathie
Deutsche Pres

3,200 Viewed

Frankfurt (dpa) - The European Central Bank cut interest rates to a record low, as some downside risks to the euro-area economic outlook have materialized.

 

 Policy makers lowered the main refinancing rate and the deposit rate by 25 basis points to 0.75 per cent and zero respectively.

 "Economic growth in the euro area continues to remain weak with heightened uncertainty weighing on both confidence and sentiment," ECB President Mario Draghi said at a press conference in Frankfurt.

This is the third rate cut since he took over as ECB head last year as the bank steps up its efforts to counter the economic fallout from the long-running euro zone crisis.

 

 The forecast reduction in the ECB's benchmark refinancing rate by 25 basis points to 0.75 per cent would come after moves last week by European leaders to ease bond markets and spur growth.

 Draghi has called on Europe's political leaders to take action to solve the crisis that is now in its third year and has forced Greece, Ireland, Portugal, Spain and Cyprus to ask for bailouts.

 "The cut seems to be a done deal," said Commerzbank analysts in anote to clients.

 This would also represent the first time that borrowing costs in the 17-member euro zone have fallen below 1 per cent since Europe's monetary union was launched more than 12 years ago.

 European shares have gained ground in anticipation of a fresh round of monetary action from the Frankfurt-based ECB.

 Draghi is also likely be pressed at a press conference following the ECB's 23-head governing council meeting to provide more details on the bank's new role in supervising the euro zone's largest lenders as envisaged by European leaders at their summit last week.

 In addition, the 64-year-old ECB chief is likely to be quizzed on how far the bank might be prepared to go in easing the tough bailout terms facing Greece as it battles to put its finances into shape.

 Interest rates in the currency bloc have been on hold since December when the bank lowered borrowing costs to 1 per cent and began rolling out cheap loans to banks totalling more than 1 trillion euros.

 The move was designed to head off a credit crunch. It helped lower the borrowing costs of heavily indebted euro zone members Spain and Italy.

 The benefits of the cheap loans programme were short lived.

 The European Commission's closely watched economic confidence survey fell to its lowest level in 32 months in June as more member states stumbled into recession.

 The borrowing costs of Spain and Italy have also risen to almost unsustainable levels, raising fears that they would be shut out from the markets and forced to seek bailout.

 Analysts believe the ECB could follow up a possible rate cut this week with an announcement in the coming months of a new cheap loans programme to try to reverse a slump in growth.

 On Monday, Eurostat, the European Union's statistics office said unemployment in the currency bloc climbed for the 13th consecutive month in May to hit a record 11.1 per cent.

 At the same time, annual inflation in the euro zone remained at a16-month low of 2.4 per cent in June.

 While the data showed inflation in the euro zone remained stuck above the ECB's 2-per-cent annual target for the 19th month in a row in June, both the bank and analysts expect inflationary pressures to ease this year.

 "The prospect of moderate inflation allows the ECB room for maneuver to cut its main policy rate further," said ING Bank economist Martin van Vliet.

  Figures released by the ECB showed annual credit growth to companies and households in the euro zone slid back into negative territory in May and as a result of moderate price pressures.

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