ECB cuts rate to record low but steers clear of more dramatic moves

The European Central Bank cut interest rates to a record low yesterday to breathe life into a deteriorating eurozone economy but steered clear of more dramatic measures, such as buying government bonds or flooding banks with fresh liquidity.

The ECB policymakers’ decision to cut their main refinancing rate by a quarter point to 0.75% was unanimous and followed a dire batch of economic data that showed Germany entering a modest downturn.

European shares gained on the decision before turning negative after ECB president Mario Draghi said the eurozone would recover only slowly, threatened by the debt woes of several of the bloc’s members and banks’ unwillingness to lend.

The ECB’s loosening of policy followed shortly after China and Britain did similar.

The ECB also reduced its deposit rate, which acts as a floor for the money market, to 0% from 0.25%. This move could encourage banks to lend to each other rather than simply parking up to €800bn back at the ECB every night.

The interest rate cut is not seen as a panacea for the eurozone’s problems, which stem from a loss of confidence in state and bank finances, but the reduction in borrowing costs shows the ECB is ready to support the flagging economy.

“The ECB interest rate cut does little to alter the bleak economic outlook,” said Jennifer McKeown at Capital Economics. “At least the action is a sign of support.”

The ECB resisted pressure from investors and the IMF to take bolder measures, such as resuming its purchases of government bonds.

A core of its policymakers feel the bank’s bond buying programme — dormant for four months now — amounts to monetary financing of governments, which is beyond the bank’s mandate.

Mr Draghi also gave no strong signal that the ECB would repeat the twin 3-year ultra-cheap loans, or LTROs, with which it funnelled over €1tn to banks in December and February.

“We didn’t discuss any other non-standard measures,” he said.

Mr Draghi dismissed another crisis response option: allowing the ESM rescue fund to have access to the ECB’s cheap loans — a scenario that would boost the ESM’s firepower and allow it to intervene with real impact on bond markets.

Asked if the ECB could boost the ESM, Mr Draghi replied:“I don’t think there is anything to gain in destroying the credibility of an institution, asking it to behave outside the limits of its mandates.”

— Reuters