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European Central Bank slashes interest rates
Widely expected quarter-percentage point cut intends to make both businesses and consumers borrow and spend more money.
Last Modified: 05 Jul 2012 20:22
President of the European Central Bank, Mario Draghi, speaks at an ECB press conference in Frankfurt [EPA]

The European Central Bank has cut its key interest rate by a quarter percentage point to a record low 0.75 per cent to try to help ease Europe's financial crisis and boost its sagging economy.

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 eurozone economy would recover only gradually. Some of the risks foreseen from the debt crisis had already materialised, pushing the bank to act, he said.

'Artillery ready'

Analysts warned the rate cut might do little to jolt the eurozone economy back to life, however.

Borrowing rates are already low, but businesses and households are not spending money because they are afraid of the economic outlook.

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Draghi said there is more the ECB could do to stimulate growth. "we still have all our artillery ready," he said, adding that low inflation gives the bank more wiggle room. But he suggested no further actions were imminent.

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 0.5 per cent and the Dow 0.2 per cent. The euro was down 1.1 per cent to $1.2380.

"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.

Rescue loans

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.

The goal would be to drive down troubled countries' borrowing costs. They also agreed to create a single Europe-wide banking regulator to prevent bank bailouts from wrecking individual countries' government finances.

Collectively, the moves sent a message to financial markets that leaders from the 17 countries that use the euro could work together to fix their problems.

They also helped lower the high borrowing costs for financially stressed countries such as Italy and Spain, the euro region's third- and fourth-largest economies.

Lending activity in the eurozone has remained weak because businesses are not asking for credit because of the slow economy and out of fear that the eurozone may suffer a further financial calamity.

Concerns remain that bankrupt Greece could eventually leave the euro, causing more turmoil, or that Spain and Italy could need bailouts that would strain the resources of donor countries.

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