ECB likely to cut interest rates today

THE European Central Bank is likely to cut interest rates today and offer ultra- long liquidity operations to support banks, while leaving the door open to further measures to fight Europe’s debt crisis if governments agree fiscal reforms.

A Reuters survey of 73 analysts showed a 60% chance the ECB will cut rates by 25 basis points to a record low of 1.0% — a floor it previously reached during the financial crisis in 2009. It cut rates by a similar amount in November.

New ECB president Mario Draghi reinforced expectations for a rate cut last week when he said the bank had a responsibility to ensure inflation did not undershoot its target of just below 2%, not just to stop it exceeding it.

Markets have taken it to heart. Three-month Euribor futures — one of the main gauges of market expectations — point to rates being be cut this month and then even further.

The case for a cut is supported by the eurozone economy teetering on the brink of recession. With the ECB increasingly concerned about falling consumer prices, further cuts may be in the offing, even if the ECB has never cut rates below 1% before — not even after the collapse of Lehman.

This week’s ECB meeting, meanwhile, comes at a key time for the currency bloc — just before a supposedly make-or-break EU summit on Friday that aims to agree on a treaty change to anchor coercive budget discipline for the 17-nation currency area.

Draghi hinted in his comments to the European Parliament last week that the ECB could take stronger action to fight the crisis if European leaders agree on tighter budget controls.

Draghi made his comments a day after the world’s major central banks took emergency joint action to provide cheaper dollar funding for starved European banks.