ECB cuts interest rates as second recession looms
Surprise shift in policy comes as companies count cost of Europe's economic woes
Nikhil Kumar is The Independent's New York correspondent. He was formerly assistant editor on the foreign desk and has also done a variety of jobs on the city desk, where he wrote about markets, commodities and other business and economics topics.
Friday 04 November 2011
The chill spreading throughout the European economy could trigger another recession by the end of the year, the new head of the European Central Bank warned as he announced a cut in interest rates yesterday.
Mario Draghi, who took over from Jean-Claude Trichet as Europe's top monetary policymaker on Tuesday, said the ECB Council was unanimous in its surprise decision to cut its benchmark rate from 1.5 to 1.25 per cent.
The move was an acknowledgement of the gravity of the crisis engulfing the euro area, which is faced with slow growth and an increasingly violent sovereign debt storm. It also marks an about turn for the ECB, which earlier this year became the first major central bank to start raising interest rates after they were slashed in response to the financial crisis three years ago.
"What we are observing now is... slow growth heading towards a mild recession by year-end," Mr Draghi said, warning that downgrades to "forecasts and projections for average real GDP growth in 2012 [are] very likely."
He offered reassurance on inflation, saying that, although it is likely to stay above the ECB's 2 per cent target for "some months to come", it was "expected to decline further in the course of 2012 to below 2 per cent". He did not, however, signal any expansion in the ECB's programme of buying sovereign bonds to ease the pressure on troubled economies such as Italy.
Shortly before he spoke, the impact of the crisis was highlighted by news of slumping profits and slowing sales at larger firms from across and beyond the euro area. The French bank BNP Paribas reported a 72 per cent fall in quarterly net profits after it recorded a bigger-than-expected writedown on Greek debt and slashed its exposure to other sovereign debt. In Amsterdam, its rival ING announced plans to cut 2,700 jobs in its Dutch retail arm, with its chief executive Jan Hommen warning: "Income is coming under pressure in the current environment."
The insurer Aviva was also counting the cost of the weakness in the continental economy yesterday, saying that its life insurance sales had declined in the first nine months of the year, partly owing to conditions in Europe. "Some of the short-term headwinds in those markets are very real," its chief executive, Andrew Moss, said.
There were also concerns about banks rushing to cut their exposure to eurozone debt afte both BNP and ING said they had reduced their holdings. "The market value of the debt of the countries most under scrutiny is likely to decline further as banks unload sovereign bonds," Charles Dallara, the managing director of the Institute of International Finance, said earlier in the week.
- 1 The BBC has just done more to eradicate ‘terrorism’ than all our wars since 9/11
- 2 Dog thinks owner is drowning in lake, dives in and tries to pull him out
- 3 Thank heavens for Louise Mensch and her foul-mouthed tweets to world leaders
- 4 Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
- 5 Phil Neville backtracks on Tomas Rosicky 'I'd smash him' comments from Match of the Day 2
Saudi preacher who 'raped and tortured' his five -year-old daughter to death is released after paying 'blood money'
Greece elections: Greek PM Alexis Tsipras takes aim at 'neo-liberal' Europe as country gears up for prolonged austerity battle
Auschwitz liberation 70th anniversary: Woman sent to three Nazi death camps describes surviving gas chamber
Prince Philip set to be knighted by Australia: Celebrate by reading his greatest gaffes
New York snow: Winter Storm Juno downgraded as 'one of the largest snowstorms in history' fails to show
'We would evict Queen from Buckingham Palace and allocate her council house,' say Greens
French court convicts three over homophobic tweets, in case hailed as a 'significant victory' by LGBT rights campaigners
Greece elections: Syriza and EU on collision course after election win for left-wing party
British Muslim school children suffering a backlash of abuse following Paris attacks
Islamic history is full of free thinkers - but recent attempts to suppress critical thought are verging on the absurd
Leaked documents show Ukip leaders approve NHS privatisation once it becomes more 'acceptable to the electorate'
iJobs Money & Business
£30000 - £32000 per annum + benefits : Ashdown Group: A highly successful, int...
£18000 - £20000 per annum: Recruitment Genius: This rapidly expanding business...
£25 - 28k + Bonus: Guru Careers: An In-house / Internal Recruiter is needed to...
Negotiable: Recruitment Genius: A Tax Assistant is required to join a leading ...