ECB lowers key interest rate to 1.25 per cent

The European Central Bank has cut interest rates by a quarter point to 1.25 per cent from 1.5 per cent.

Mario Draghi, the new ECB president, said on Thursday the eurozone could subside into a “mild recession” in the latter part of 2011 as growth was to likely to remain weak.

He said that Europe’s financial crisis and a slowdown in global growth meant the euro area faced an “environment of high uncertainty.

“A significant downward revision to forecasts and projections for average real GDP growth in 2012 [are] very likely”.

The rate cut gave a modest boost to stock markets as the FTSE 300 index of top European shares was up
1.3 percent at 1400 GMT.

Inflation in the eurozone, currently three per cent, would remain at “elevated” levels for some months, driven by higher energy and commodity prices.

But Draghi forecast that inflation would fall to below two per cent during 2012.

Draghi will be joining join the leaders of the G20 in Cannes, France, after his debut news conference as ECB chief.

Europe’s ultimatum to Greece, after Greek leader George Papandreou’s decision to call a referendum on a bailout plan, has deepened the crisis and raised pressure on the ECB, which many analysts see as the only institution with the firepower to bring calm.