ECB cuts rates to avoid slump
Source: Agencies |
November 4, 2011, Friday
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Print Edition
Print Edition
THE European Central Bank has cut interest rates by a quarter percentage point under new head Mario Draghi as it tries to boost a weakening economy that's reeling from a government debt crisis that threatens to spread from Greece.
The dramatic debut move from Draghi, which comes earlier than expected by many economists, takes the bank's benchmark rate to 1.25 percent.
European growth is expected to slow in the last three months of the year, and the rate cut is aimed at preventing an outright recession. Uncertainty from Europe's debt crisis is a factor as business and consumers are reluctant to spend and investors are worried of the potential for more financial turmoil if Greece defaults on its debts.
The current market turbulence is "likely to dampen the pace of economic growth in the second half of the year and beyond," said Draghi at his post-meeting press conference. That, in turn, would lower the risk of inflation remaining high.
The hope in the markets is that yesterday's interest rate cut will shore up confidence at a time when Europe is embroiled in a crisis stemming from Greek Prime Minister George Papandreou's pledge to hold a referendum on the country's latest bailout package.
"It is obvious that the ECB has caught the crisis virus and is trying everything it can to prevent a full-fledged recession," said economist Carsten Brzeski at ING.
The bank's key rate had stood at 1.5 percent after rises in April and July aimed at warding off inflation.
Since then the economic outlook has worsened significantly for the 17 countries that use the euro, leading many analysts to think the bank was leaning toward a rate cut. But many thought it would not come until December or earlier next year.
Inflation at an annual rate of 3 percent - well above the bank's goal of just under 2 percent - gave ammunition to those arguing for a delay. Rate cuts spur growth but can worsen inflation, and fighting inflation is the bank's chief mission.
But leading signs on business confidence have been sending ominous signs about growth, and Draghi's predecessor Jean-Claude Trichet last month stressed the high level of doubt for Europe's economy.
Markets are looking for signs that Draghi is willing to intervene more forcefully in bond markets to keep Greece's troubles from spreading to Spain and Italy.
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