ECB open to further cut in interest rates

The ECB cut interest rates for the first time in 10 months yesterday and held out the possibility of further action to support the recession-hit eurozone economy.

Responding to a drop in eurozone inflation well below its target level and rising unemployment, the ECB lowered its main rate by a quarter percentage point to a record low 0.50%.

ECB president Mario Draghi — promising to provide as much liquidity as eurozone banks need well into next year and to help smaller companies get access to credit — also indicated that some policymakers had pushed for a bigger cut.

“There was a very, very strong prevailing consensus towards an interest rate cut,” he told a news conference after the ECB’s Governing Council met in Bratislava.

“Within that, there was a prevailing consensus for a cut of only 25 basis points.”

The ECB was also “technically ready” to cut its deposit rate from the current 0% into negative territory, meaning it would start charging banks for holding their money overnight.

Such a move could encourage the banks to lend out money rather than hold it at the ECB, though it would also probably have a big impact on banks’ own operations and major implications for funding and bond markets.

Mr Draghi said the ECB could cope with these — a departure from his previous statements.

“There are several unintended consequences that may stem from this measure,” he said of a negative deposit rate.

“We will address and cope with these consequences if we decide to act. And we will again look at this with an open mind and we stand ready to act if needed.”

Yesterday’s cut in the main rate had been widely expected after Mr Draghi said last month that the ECB stood ready to act, but few economists expect it to make a decisive difference.

Acknowledging that, the ECB said it would prime banks with as much liquidity as they need until at least Jul 2014 and look at ways to boost lending to smaller companies, which are the lifeblood of Europe’s economies but have been starved of credit in many countries.

“Today’s rate cut mainly provides support for peripheral banks and could boost confidence marginally,” said Carsten Brzeski, ING economist.

— Reuters