ECB interest rate cut to 0.25% in surprise move

The ECB cut its benchmark interest rate, surprising most market analysts, to 0.25% from 0.5%. The current ECB interest rate is the closest it has ever been to zero.

With the prospect of sluggish and jobless economic growth and a very low inflation rate, the 20 members of the Governing Council of the ECB (European Central Bank) which met today decided to use nearly the only tool left to help stimulate growth.

In October inflation in the Eurozone fell to 0.7% (annualized), its lowest rate since November 2009. Economists fear this deflationary environment may harm the region’s fragile economic recovery.

In a public online communiqué, the ECB wrote:

  • The ECB interest rate, its benchmark rate on the main refinancing operations of the Eurosystem, will go down 25 basis points to 0.25%, starting on November 13th, 2013.
  • The ECB interest rate on the marginal lending facility will be reduced by 25 basis points to 0.75%, starting on November 13th, 2013.
  • The deposit facility interest rate will stay at 0.0%.

In a press conference today, Mario Draghi, President of the ECB said that the ECB Governing Council’s decision was in line with the Central Bank’s forward guidance of July “..given the latest indications of further diminishing underlying price pressures in the euro area over the medium term, starting from currently low annual inflation rates of below 1%.”

Draghi added that credit dynamics in the Eurozone remain subdued and inflation over the medium- and long-term are firmly anchored within the target of 2%. Such a constellation suggests that the region is in for a long period of low inflation, followed by an upward movement later on nearer (but still below) 2%.

Draghi added “Accordingly, our monetary policy stance will remain accommodative for as long as necessary. It will thereby also continue to assist the gradual economic recovery as reflected in confidence indicators up to October.”

As inflation is expected to remain low for a long time, unemployment will stay high and the “broad-based weakness of the economy and subdued monetary dynamics”, the ECB says it expects its benchmark interest rate to remain at its present or even lower levels “for an extended period of time”.

ECB interest rate cut will hopefully boost business loans

By reducing its benchmark rate, which makes it cheaper for banks to borrow from the European Central Bank, the Governing Council hopes that this will lead to more business loans, which in turn will boost the economy and reduce unemployment.

On Tuesday the European Commission predicted very moderate economic growth with persistently high unemployment, what many are calling “European jobless growth”.

In an interview with the Wall Street Journal, ING economist Carsten Brzeski said “It is obvious that the ECB under President Draghi has become much more proactive than under any of his predecessors.”

Under its previous President, Jean-Claude Trichet, the ECB never surprised the market. Analysts agree that on this occasion the ECB decided it had to move quickly to prevent the fragile economic recovery from losing steam.

Euro falls after ECB interest rate cut

The euro fell today against the dollar, pound, yen and several other currencies. It slipped below $1.33 for the first time in nearly seven weeks, reached a ten month low against the pound (£0.8302), and a 4-week low against the yen (¥132.34).

Tony Barber wrote in the Financial Times today that the ECB has now shown it is not only independent of the pressures from Eurozone politicians, but is also independent of the Bundesbank-style post-war fixation on inflation.

European politicians welcomed the ECB interest rate cut. Enrico Letta, Prime Minister of Italy, said “(this shows that) the ECB cares about growth and competitiveness in Europe”. He added the ECB move will help re-balance the dollar-euro rate.

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