Last updated: July 5, 2012 3:47 pm

ECB cuts interest rates to historic low

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ECB Headquarters©Bloomberg

The European Central Bank has cut its main interest rate to a historic low amid signs that prospects for the eurozone economy are looking increasingly bleak.

Mario Draghi, ECB president, said policy makers had “unanimously” decided to cut the central bank’s main policy rate by a quarter of a percentage point to 0.75 per cent, pushing the rate under 1 per cent for the first time.

“We are now seeing a weakening of growth in the whole of the euro area, including countries that had not experienced it before,” Mr Draghi said. That all 22 members of the governing council voted for the cut “carries a special strength to the decision”, the ECB president said.

The ECB also cut the interest rate on its deposit facility to zero, marking a bold step in its attempts to reduce general market interest rates and stimulate interbank lending.

The deposit rate is what the ECB pays banks for their overnight deposits with it. It in effect sets a floor for market rates, since banks have no incentive to lend to each other for less reward than they get for parking money safely at the central bank.

The move came as the People’s Bank of China cut its benchmark lending rate by 31 basis points – the second cut in less than a month – and the Bank of England held its rate but increased the level of quantitative easing by £50bn to £375bn, on the back of evidence of a global economic slowdown.

Mr Draghi said the decisions by central banks around the world to ease monetary policy were not co-ordinated. He added that he expected the drop-off in global demand to stabilise and said conditions were not yet as bad as they were in the months following the bankruptcy of US investment bank Lehman Brothers, which sparked a collapse in international trade.

Thursday’s decision follows broad ECB approval for measures taken by EU leaders at a summit last month, when the foundations were laid for the central bank to begin eurozone-wide banking supervision and for lenders in Spain to use EU bailout funds directly.

Mr Draghi refused to comment on whether the ECB should be handed powers for banking supervision. However, he said if EU officials were keen on it taking such a role, the governing council would support moves to make the ECB more democratically accountable.

Bank policy makers discussed a rate cut last month, since when fresh data have suggested increased risks to the eurozone economy, with concern over the outlook for Germany – hitherto the brightest spot in the region. However, German factory orders unexpectedly rose in May, driven by eurozone demand, the country’s economy ministry said on Thursday.

Receding inflationary pressures have also paved the way for the central bank’s rates decision. Mr Draghi said the chances of inflation moving above or below its target of just below 2 per cent in the years ahead were “broadly balanced”.

Additional reporting by Claire Jones.

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