ECB cuts interest rates to record low

Main interest rate reduced to 0.5 per cent amid weak economic activity and tame inflation

President of the European Central Bank Mario Draghi signs the newly introduced €5  banknote for a school boy after an ECB news conference  in Bratislava today. Photograph: Petr Josek /Reuters

President of the European Central Bank Mario Draghi signs the newly introduced €5 banknote for a school boy after an ECB news conference in Bratislava today. Photograph: Petr Josek /Reuters

Thu, May 2, 2013, 16:47

European Central Bank president Mario Draghi announced a range of measures to boost the flow of credit and left the door open to further monetary easing after today's interest rate cut.

"Our monetary policy will remain accommodative for as long as needed" and officials "will monitor very closely all incoming information" in the months ahead, Mr Draghi said at a press conference in Bratislava today after the ECB cut its benchmark interest rate by a quarter point to a record low of 0.5 per cent.

He said the ECB will continue to lend banks has much money as they need at least until mid-2014.

Mr Draghi also said that the bank has started to consult with European institutions on initiatives to "promote a functioning market for asset-backed securities collateralised by loans to non-financial corporations".

The rate cut, the first since July last year, may not be enough to haul the 17-nation euro economy out of recession and Mr Draghi said last month that officials were also looking at additional non-standard stimulus measures. He reiterated today that the ECB's policy isn't being transmitted evenly across the currency union.

"To ensure adequate transmission of monetary policy it is essential that the fragmentation of euro-area credit markets continue to decline further," Mr Draghi said.

However, it will reduce repayments for tens of thousands of Irish people with tracker mortgages tied to the central bank’s rates.

For every quarter of a point the ECB lowers rates, the monthly cost of servicing a €100,000 tracker mortgage declines by about €15. This means that the average tracker mortgage holder with an outstanding loan of €300,000 will see monthly savings of €45 from the beginning next month.

As a result of the move – the fourth such rate reduction in the last 18 months – a person with a €300,000 tracker mortgage will now pay about €180 a month less than they were paying in the autumn of 2011. This amounts to a total annual saving of more than €2,100.

The cut will be automatically be passed on to tracker mortgage holders but those with Standard Variable Rate (SVR) mortgages will have to wait for their individual banks to follow suit although such a move is unlikely as banks are using SVR customers pay for loss-making tracker ones.

Analysts were divided on the probability of a rate cut, but a swathe of economic figures published this week bolstered the case for monetary intervention.

Unemployment reached a new high last month, according to figures published on Tuesday, with more than one in four people in the euro zone now out of work. Business sentiment in the zone also fell in April, while inflation dropped to 1.2 per cent, the lowest in three years and well below the ECB’s 2 per cent ceiling.

Data from China and the US yesterday also increased concern about the state of the global economy. A key barometer of manufacturing activity in the US dipped to 50.7 from 51.3 the previous month, and growth in Chinese manufacturing activity also slowed last month.

ECB president Mario Draghi, who last month said the ECB remains “accommodative” and “stands ready to act” if required, could also announce so-called “non-standard measures”. These may include a move to ease the conditions at which banks borrow from the central bank to stimulate lending in the euro zone, or a change to the collateral requirements for loans to SMEs.

Speaking in April, Mr Draghi said the bank was looking at various non-standard instruments and tools, taking account of what has worked in other countries.

Today’s meeting – one of two governing council gatherings held outside Frankfurt each year – is the first since the euro zone’s fiscal consolidation policy has come under scrutiny.

Spurred by comments from European Commission president José Manuel Barroso last week which suggested that austerity may have reached its limits, euro-zone policymakers have been forced to defend their policy response to the economic crisis, amid worsening economic data.

Additional reporting: Bloomberg