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ECB lowers interest to record low 0.75%; pushes banks to lend by cutting overnight rate to zero

Thursday, July 5th 2012 - 22:22 UTC
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Dragui says the bank had further artillery to help the EU economy Dragui says the bank had further artillery to help the EU economy

The European Central Bank cut its key interest rate by a quarter percentage point Thursday to a record low 0.75% to try to help ease Europe’s financial crisis, boost its sagging economy and restore confidence.

The action, which was widely expected, is meant to make it cheaper for businesses and consumers to borrow and spend money. But experts said that fear over the economy was so high in Europe that the cut might only have limited effect.

In a more surprising move, the ECB cut the interest rate it pays banks on overnight deposits by a quarter percentage point to zero. This pushes banks to lend the money, rather than sock it away with the ECB.

ECB President Mario Draghi said the Euro-zone economy would recover only gradually and that risks ‘‘continue to be on the downside.’’ He said that some of the risks foreseen from the debt crisis had already materialized, pushing the bank to act.

Analysts warned the rate cut might do little to jolt the Euro zone economy back to life. Borrowing rates are already low, but businesses and households are not spending money because they are afraid of the economic outlook.

Draghi conceded the cut sent a ‘‘muted’’ signal given weak demand for credit. But he said the move was an important signal of encouragement for businesses during a time of uncertainty. ‘‘It should make entrepreneurs think that their investment decisions and tradeoffs are now improved,’’ he said.

He said that despite the low level of interest rates, the ECB was not running out of room to provide more help to the economy: ‘‘We still have all our artillery ready.’’

He suggested, however, that the ECB is unlikely to use again soon the emergency support measures it has tried in the past — cheap loans to banks or purchases of government bonds in the open market.

Draghi said these measures were not likely to be useful as long as Europe’s financial markets remain disjointed. Government borrowing rates are very high in Spain and Italy, for example, but at record lows in Germany. That reflects differing degrees of investor confidence in those countries.

Stock markets initially rose after the news, but the gains faded as investors worried about a slowdown in the global economy. Germany’s DAX stock index fell 0.8% and the Dow 0.3%. The Euro was down 1.1%t at $1.2380.

Draghi said the ECB was free to cut rates because inflation was expected to fall. The ECB has a strict mandate to fight inflation as its first priority, unlike the U.S. Federal Reserve which can juggle concerns about inflation against the need to make the economy grow and create jobs.

‘‘Today’s ECB interest rate cut does little to alter the bleak economic outlook,’’ said Jennifer McKeown, analyst at Capital Economics.

She said the ECB is likely to now wait and see how the financial markets and the economy react to the rate cut and to the new emergency measures announced by European leaders last week.

The leaders agreed to make it easier for troubled countries and banks to receive rescue loans from Europe’s bailout fund and also signaled greater willingness to use emergency funds to purchase government bonds.

Joerg Kraemer, chief economist at Commerzbank, said the cut wouldn’t fix what was wrong. The reason the Euro zone economy is weak is not because of ‘‘high ECB rates but because of uncertainty stemming from the sovereign debt crisis. This can’t be cured by lower rates.’’

Categories: Economy, International.

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