ECB cuts interest rates as second recession looms

Surprise shift in policy comes as companies count cost of Europe's economic woes

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.

Start your day with The Independent, sign up for daily news emails
ebooksA celebration of British elections
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Ashdown Group: Editor-in-chief - Financial Services - City, London

£60000 - £70000 per annum + benefits : Ashdown Group: A highly successful, glo...

Ashdown Group: Junior Application Support Analyst - Fluent German Speaker

£25000 - £30000 per annum + benefits: Ashdown Group: A global leader operating...

Guru Careers: Management Accountant

£27 - 35k + Bonus + Benefits: Guru Careers: A Management Accountant is needed ...

Guru Careers: Project Manager / Business Analyst

£40-50k + Benefits.: Guru Careers: A Project Manager / Business Analyst is nee...

Day In a Page

General Election 2015: ‘We will not sit down with Nicola Sturgeon’, says Ed Balls

'We will not sit down with Nicola Sturgeon'

In an exclusive interview, Ed Balls says he won't negotiate his first Budget with SNP MPs - even if Labour need their votes to secure its passage
VE Day 70th anniversary: How ordinary Britons celebrated the end of war in Europe

How ordinary Britons celebrated VE Day

Our perception of VE Day usually involves crowds of giddy Britons casting off the shackles of war with gay abandon. The truth was more nuanced
They came in with William Caxton's printing press, but typefaces still matter in the digital age

Typefaces still matter in the digital age

A new typeface once took years to create, now thousands are available at the click of a drop-down menu. So why do most of us still rely on the old classics, asks Meg Carter?
Discovery of 'missing link' between the two main life-forms on Earth could explain evolution of animals, say scientists

'Missing link' between Earth's two life-forms found

New microbial species tells us something about our dark past, say scientists
The Pan Am Experience is a 'flight' back to the 1970s that never takes off - at least, not literally

Pan Am Experience: A 'flight' back to the 70s

Tim Walker checks in and checks out a four-hour journey with a difference
Humans aren't alone in indulging in politics - it's everywhere in the animal world

Humans aren't alone in indulging in politics

Voting, mutual back-scratching, coups and charismatic leaders - it's everywhere in the animal world
Crisp sales are in decline - but this tasty trivia might tempt back the turncoats

Crisp sales are in decline

As a nation we're filling up on popcorn and pitta chips and forsaking their potato-based predecessors
Ronald McDonald the muse? Why Banksy, Ron English and Keith Coventry are lovin' Maccy D's

Ronald McDonald the muse

A new wave of artists is taking inspiration from the fast food chain
13 best picnic blankets

13 best picnic blankets

Dine al fresco without the grass stains and damp bottoms with something from our pick of picnic rugs
Barcelona 3 Bayern Munich 0 player ratings: Lionel Messi scores twice - but does he score highest in our ratings?

Barcelona vs Bayern Munich player ratings

Lionel Messi scores twice - but does he score highest in our ratings?
Martin Guptill: Explosive New Zealand batsman who sets the range for Kiwis' big guns

Explosive batsman who sets the range for Kiwis' big guns

Martin Guptill has smashed early runs for Derbyshire and tells Richard Edwards to expect more from the 'freakish' Brendon McCullum and his buoyant team during their tour of England
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'