European Central Bank cuts rates to new low
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.ECB
President Mario
Draghi said the eurozone economy would recover only gradually. Some of the
risks foreseen from the debt crisis had already materialized, pushing the bank
to act, he said.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."Today's ECB interest
rate cut does little to alter the bleak economic outlook," said Jennifer
McKeown, analyst at Capital
Economics.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
cuntries'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 gThe 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.There are other safe havens for banks to
place their money government bonds of financially strong countries like
Germany, for example. But a central bank is considered the ultimate safe
haven since it can print money at will.The eurozone crisis has battered
investor confidence for 2 ½ years. It has seen Greece, Ireland and Portugal
need bailouts from the other eurozone countries and the International
Monetary Fund to keep paying their debts and covering their budget
deficits. Spain has asked for as much as €100 billion in rescue loans for
its banks.Earlier in the day, the central banks of China and Britain took
action to stimulate their economies.The Bank
of England decided to purchase another 50 billion pounds in government
bonds from financial institutions. The hope is that the banks will use the
extra cash to lend to businesses and households.China's central bank,
meanwhile, cut interest rates for the second time in a month to shore up its
economy, the second-largest in the world. Interest on a one-year loan was
reduced by 0.31 percentage points to 6 percent effective Friday. Chinese
authorities have rolled out a series of stimulus measures since March after
economic growth slowed to a nearly three-year low of 8.1 percent in the first quarter.In
the U.S., weak economic indicators have raised speculation that the U.S.
Federal Reserve may also have to do more to keep the U.S. economy growing. Some
think the Fed might carry out a third round of bond purchases aimed at driving
down interest rates on business and consumer loans.The Fed took more
limited action at its meeting ending June 17, extending its so-called Operation
Twist effort in which it sells short-term bonds and buys longer-dated issues to
push down long term interest rates. The Fed meets next Aug. 1.
