ECB shocks investors with surprise cut
Print Edition
The European Central Bank startled investors yesterday with a surprise cut in its benchmark interest rate aimed at boosting a hesitant recovery in the 17 countries that use the euro.
The bank lowered the benchmark refinancing rate to a record low 0.25 percent from 0.5 percent at a meeting of its 23-member governing council in Frankfurt. Stock markets rallied, and the euro slumped on the news.
Recent economic data, such as unexpectedly low inflation, showed the eurozone’s economic recovery remains weak. But most economists thought the bank would wait to offer more economic stimulus at least until December, when it will have new forecasts from its own staff.
The surprise move underlined the ECB’s greater flexibility under President Mario Draghi, who took office in November 2011. His predecessor, Jean-Claude Trichet, was more resistant to lower rates.
A lower refinancing rate makes it cheaper for banks to borrow from the ECB. The hope is that would encourage banks to charge less for loans, making it easier for companies to expand and create jobs.
“It is obvious that the ECB under President Draghi has become more proactive than under any of his predecessors,” analyst Carsten Brzeski wrote in a note to investors.
The current eurozone inflation rate — at 0.7 percent, well below the ECB’s goal of just under 2 percent — has also untied its hands to try further monetary stimulus without fear that it could stoke inflation. Draghi held the door open for more cuts, although the current rate is now near zero.
“In principle, we could cut even further,” he said, noting that inflation is expected to remain low for a prolonged period of time.
The ECB is also extending its offer of unlimited short-term cheap credit for banks until mid-2015. The offer aims to ensure banks do not run into problems raising ready cash to operate and can focus instead on lending, which is needed for growth. It also lessens worry over a possible cash shortage among banks when two, massive rounds of three-year emergency credit expire in early 2015 and have to be paid back.
Analysts have said another such long-term offer could be coming, but Draghi gave little indication other than to say: “We have a whole range of instruments we can activate.”
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