ECB reduces rates to a record low
Source: Agencies |
July 6, 2012, Friday
|
Print Edition
Print Edition
THE European Central Bank cut interest rates to a record low yesterday to breathe life into a deteriorating eurozone economy but steered clear of more dramatic measures such as buying government bonds or flooding banks with fresh liquidity.
The quarter-point cut in the ECB's main refinancing rate to 0.75 percent was in line with market expectations and followed a dire batch of economic data that show even eurozone powerhouse Germany is entering a modest downturn. Of 71 economists polled by Reuters, 48 had expected the ECB to cut, most of them by 25 basis points, though some others forecast a larger drop.
ECB President Mario Draghi said the eurozone economy would recover only gradually, threatened by the debt problems of several of the bloc's members and banks' unwillingness to lend.
"The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi told a news conference. "Beyond the short term, we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions."
The ECB's loosening of policy followed shortly after China and Britain did similar.
Draghi said there was no coordination between the three.
In addition to cutting the main refinancing rate, the ECB also reduced its deposit rate, which acts as a floor for the money market, to zero from 0.25 percent.
This move could encourage banks to lend to each other rather than simply parking funds of up to 800 billion euros back at the ECB every night, for which they will now get no return.
It will also be welcomed by the southern European banks that have tapped the ECB heavily for loans. A 25-basis-point cut would decrease annual interest payments from the 1 trillion euros in three-year loans by about 2.5 billion euros.
The interest rate cut is not seen as a panacea for the eurozone's problems, which stem from a loss of confidence in state and bank finances, but the reduction in borrowing costs shows the ECB is ready to support the flagging economy.
Draghi said the decision was unanimous. "This carries a special strength," he said.
The ECB had faced pressure from investors and the International Monetary Fund to take bolder measures, with IMF Managing Director Christine Lagarde urging it to resume its buying of government bonds.
The ECB did not heed that advice. A core of its policymakers feel the bank's bond buying program - dormant for four months now - amounts to monetary financing of governments, which is beyond the bank's mandate.
Draghi also gave no strong signal that the ECB was poised to offer a repeat of the twin three-year ultra-cheap loans, with which it funneled more than 1 trillion euros to banks in December and February.
But neither did he rule it out.
"We always said that our non-standard measures are temporary, and we don't want to pre-commit about future decisions," Draghi said.
The quarter-point cut in the ECB's main refinancing rate to 0.75 percent was in line with market expectations and followed a dire batch of economic data that show even eurozone powerhouse Germany is entering a modest downturn. Of 71 economists polled by Reuters, 48 had expected the ECB to cut, most of them by 25 basis points, though some others forecast a larger drop.
ECB President Mario Draghi said the eurozone economy would recover only gradually, threatened by the debt problems of several of the bloc's members and banks' unwillingness to lend.
"The risks surrounding the economic outlook for the euro area continue to be on the downside," Draghi told a news conference. "Beyond the short term, we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions."
The ECB's loosening of policy followed shortly after China and Britain did similar.
Draghi said there was no coordination between the three.
In addition to cutting the main refinancing rate, the ECB also reduced its deposit rate, which acts as a floor for the money market, to zero from 0.25 percent.
This move could encourage banks to lend to each other rather than simply parking funds of up to 800 billion euros back at the ECB every night, for which they will now get no return.
It will also be welcomed by the southern European banks that have tapped the ECB heavily for loans. A 25-basis-point cut would decrease annual interest payments from the 1 trillion euros in three-year loans by about 2.5 billion euros.
The interest rate cut is not seen as a panacea for the eurozone's problems, which stem from a loss of confidence in state and bank finances, but the reduction in borrowing costs shows the ECB is ready to support the flagging economy.
Draghi said the decision was unanimous. "This carries a special strength," he said.
The ECB had faced pressure from investors and the International Monetary Fund to take bolder measures, with IMF Managing Director Christine Lagarde urging it to resume its buying of government bonds.
The ECB did not heed that advice. A core of its policymakers feel the bank's bond buying program - dormant for four months now - amounts to monetary financing of governments, which is beyond the bank's mandate.
Draghi also gave no strong signal that the ECB was poised to offer a repeat of the twin three-year ultra-cheap loans, with which it funneled more than 1 trillion euros to banks in December and February.
But neither did he rule it out.
"We always said that our non-standard measures are temporary, and we don't want to pre-commit about future decisions," Draghi said.
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