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ECB cuts rates as calls mount to boost growth
Economics

ECB cuts rates as calls mount to boost growth

2 min. 02.05.2013 From our online archive
The European Central Bank pared back its key interest rates as expected Thursday amid mounting calls across the eurozone to focus on growth rather than austerity.

(AFP) The European Central Bank pared back its key interest rates as expected Thursday amid mounting calls across the eurozone to focus on growth rather than austerity.

As widely forecast by analysts, the ECB trimmed its key "refi" refinancing rate by a quarter of a percentage point to a new record low of 0.50 percent.

The central bank also cut its marginal lending facility by half a percentage point to 1.00 percent.

But it held the interest rate on the deposit facility unchanged at zero percent.

ECB President Mario Draghi was scheduled to explain the reasoning behind the different decisions at his usual monthly news conference.

Financial markets had widely anticipated the move, and were hoping as well for some unorthodox measures to boost lending to the wider economy in peripheral eurozone countries where growth remains elusive.

The euro jumped to $1.3202 after the announcement, from $1.3180 late on Wednesday in New York.

On Wednesday, the US Federal Reserve had kept its easy-money policies in place, and left the door open to stepping up bond purchases if the world's biggest economy slowed under the government's severe "sequester" spending cuts.

After keeping the main US interest rate at zero to 0.25 percent, the Fed suggested in a change from previous statements that it would keep open the option of more stimulus, larger bond purchases, if the economy slows.

The ECB's decision-making governing council met in the Slovakian capital of Bratislava this month, rather than its headquarters in Frankfurt.

IHS Global Insight analyst Howard Archer said the move had "looked ever more inevitable as latest data and survey evidence pointed to ongoing and widespread economic weakness across the eurozone as well as below target and receding inflation."

Analysts believe the rate cut was unlikely to have a major growth impact, especially given fragmented credit markets.

"But any potential help to the eurozone economy in its current state is worthwhile, and a move is certainly justified by consumer price inflation at just 1.2 percent in April now being clearly below target," Archer said.

Capital Economics economist Jennifer McKeown said the cut "in the refi rate will marginally help those peripheral banks borrowing from the ECB, but won't address the disparity in interest rates facing firms and households in different countries or the credit constraints still facing small and medium-sized enterprises (SMEs)."

Thus, ECB watchers would be waiting to hear what central bank chief Draghi would announce at the press conference, she said.

"Some further easing of collateral criteria, or measures to encourage the creation of securitised loans for SMEs have been widely discussed.

"A lack of such measures would be a disappointment," the analyst cautioned.

Newedge Strategy analyst Annalisa Piazza said "the tone of the press conference will be the key market driver.

"Signs that the ECB leaves the door open for further accommodation would be the best case scenario, in our view," she said.

The German banking federation BdB believed that "the extremely low level of interest rates will have only very small effects on the economy and bank lending to businesses."