ECB cuts interest rate to record low

 

THE EUROPEAN Central Bank took steps to revive flagging economic growth by cutting its main interest rate to a record 0.75 per cent but it spurned pressure to take new emergency steps to calm down the debt crisis.

The bank’s rate cut came on a day when the Bank of England increased its asset-buying programme and the Chinese central bank reduced rates.

The rate decision was unanimous so it carried a “special strength”, ECB chief Mario Draghi told reporters at the bank’s headquarters in Frankfurt. He also said there was no co-ordination with other global central banks beyond regular communications.

“Beyond the short term, 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.”

In spite of pressure to reignite its bond-buying campaign or initiate a new long-term refinancing operation ultra-cheap loan scheme for banks, Mr Draghi said ECB governors did not even talk about the possibility.

“We didn’t discuss any other non-standard measures,” he said. “I don’t want to elaborate on further non-standard measures at this time.”

Although some forecasters had speculated that the ECB might cut rates by as much as half a percentage point, the scale of the reduction was in keeping with the bank’s typical rate manoeuvres.

At the same time, the ECB decided that it would no longer pay any interest on deposits made by commercial banks in its safe-haven overnight facility. Use of this facility, which always pays under the going market rate, has tended to spike whenever tension escalates in banking and financial markets.

The implicit aim is to encourage banks to lend to each other rather than parking funds in the ECB every night. Such deposits will yield no return in the future.

“Economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment,” Mr Draghi said.

“The risks surrounding the economic outlook for the euro area continue to be on the downside.”

These related to sovereign debt market tensions and their potential spillover to the euro area real economy, he added.

“Downside risks also relate to possibly renewed increases in energy prices over the medium-term.”

Euro-zone inflation remains at 2.4 per cent, well above the ECB target of below but close to 2 per cent. However, Mr Draghi said inflation pressures had dampened in the light of flagging economic growth. “Inflation rates should decline further in the course of 2012 and be again below 2 per cent in 2013,” he said.

He added that entrepreneurs should take encouragement from the decision to cut rates.

Mr Draghi welcomed the outcome of last week’s EU summit, citing in particular the decision to establish a single pan-European bank regulator and the decision to allow the direct recapitalisation of euro zone banks.

This will see the ECB take a direct role in banking supervision, but Mr Draghi would not say whether this would be for large systemically important institutions or a wider range of banks.

He said he did not know what action the ECB would have taken to prevent the Libor rate-fixing scandal: “I don’t know what the ECB would have done.”