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European Central Bank cuts key interest rate to new low
FRANKFURT, Germany — The European Central Bank cut its key interest rate by a quarter percentage point Thursday to a record low 0.75 percent to try to help ease Europe’s financial crisis and boost its sagging economy.
The action, which was widely expected, is meant to make it cheaper for businesses and consumers to borrow and spend money. But experts said that fear over the economy was so high in Europe that the cut might only have limited effect.
In a more surprising move, the ECB cut the interest rate it pays banks on overnight deposits by a quarter percentage point — to zero. This pushes banks to lend the money, rather than sock it away with the ECB.
Analysts warned the rate cut might do little to jolt the eurozone economy back to life, however. Borrowing rates are already low, but businesses and households are not spending money because they are afraid of the economic outlook.
Draghi said there is more the ECB could do to stimulate growth — “we still have all our artillery ready” — and that low inflation gives the bank more wiggle room. However, he suggested no further actions were imminent.
Stock markets initially rose after the news, but the gains faded as investors worried about a slowdown in the global economy. Germany’s DAX stock index fell 0.5 percent and the Dow 0.2 percent. The euro was down 1.1 percent at $1.2380.
She said the ECB is likely to now wait and see how the financial markets and the economy react to the rate cut and to the new emergency measures announced by European leaders last week.
The leaders agreed to make it easier for troubled countries and banks to receive rescue loans from Europe’s bailout fund and also signaled greater willingness to use emergency funds to purchase government bonds. The goal would be to drive down troubled countries’ borrowing costs. They also agreed to create a single Europe-wide banking regulator to prevent bank bailouts from wrecking individual countries’ government finances.
Collectively, the moves sent a message to financial markets that leaders from the 17 countries that use the euro could work together to fix their problems. They also helped lower the high borrowing costs for financially stressed countries such as Italy and Spain, the euro region’s third- and fourth-largest economies.
Lending activity in the eurozone has remained weak because businesses are not asking for credit because of the slow economy and out of fear that the eurozone may suffer a further financial calamity. Concerns remain that bankrupt Greece could eventually leave the euro, causing more turmoil, or that Spain and Italy could need bailouts that would strain the resources of donor countries.
Joerg Kraemer, chief economist at Commerzbank, said the cut wouldn’t fix what was wrong. The reason the eurozone economy is weak is not because of “high ECB rates but because of uncertainty stemming from the sovereign debt crisis. This can’t be cured by lower rates.”
The cut to the refinancing rate will give some further relief to banks by lowering the rate they pay on the €1 trillion in cheap emergency loans they took from the ECB Dec. 21 and Feb. 29, the bank’s chief emergency measure. The rate on that money is the average refinancing rate over the life of the loan, which can be up to three years. Lower costs on that money means they can earn more when they use it to buy higher yielding investments such as government bonds.
The cut in the deposit rate is meant to push banks to stop using the ECB as a safe haven by parking money there overnight. Before the debt crisis exploded, banks would deposit about €50 billion with the ECB overnight. That ballooned as the crisis made banks wary of investing or lending money. On Wednesday, banks had placed €790 billion with the ECB overnight.
By Brahma Chellaney
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