ECB cuts key rate to tackle crisis

 


A lifeboat of emergency measures was launched by European policymakers today in a bid to rescue the sinking eurozone.

As well as slashing interest rates for the second time in five weeks, to 1% from 1.25%, European Central Bank (ECB) president Mario Draghi announced more lenient terms on loans to ease financial pressure on struggling banks.

The move came shortly after the Bank of England decided to hold interest rates at historic lows of 0.5% and maintain its level of quantitative easing - effectively money printing - at £275 billion.

Mr Draghi, who has overseen the complete reversal of what now appear to be two ill-timed rate hikes under his predecessor, Jean-Claude Trichet, also unveiled additional measures to boost money market activity.

He said: "The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks."

The ECB move comes as leaders prepare for a crucial summit in Brussels tomorrow, at which France and Germany are expected to call for a raft of new financial measures to bring about tighter fiscal union in the 17-nation eurozone.

The moves are designed to bolster financial stability in the region and find a way out of the sovereign debt crisis which has brought a number of economies to the brink of collapse.

The ECB's decision to cut rates and ease pressure on banks will be aimed at tackling the underlying problems in the eurozone - that is, weak growth, low confidence and a lack of credit.

Purchasing Managers' Index data suggest the eurozone is likely to contract by 0.5% in the fourth quarter, while price pressures look set to ease in the coming months.

Chris Williamson, chief economist at financial information services firm Markit, said: "The sovereign debt crisis has hit business and consumer confidence at the same time as austerity measures are dampening demand in many countries."

He added: "The data suggest that the ECB is correct to be more worried about stabilising the economy, helping restore confidence and fighting off deflationary forces rather than future inflation."

In the UK, the Bank of England left its own monetary policy unchanged. It has already acknowledged that it will take until February to administer the £75 billion expansion in its QE programme announced in October.

Howard Archer, chief UK and European economist at IHS Global Insight, expects a further £50 billion of QE from the Bank of England in both the first and second quarters of 2012, taking the total up to £375 billion.

He said: "Despite keeping policy on hold this month, latest data and survey evidence are likely to have largely reinforced the MPC's concerns over the economy and fuelled their belief that more QE will be required."

The latest snapshot of the UK economy has made for gloomy reading, with influential think-tank NIESR estimating that growth slowed again in the three months to November to 0.3%, from 0.4% in the three months to October.

And official figures yesterday showed a larger-than-expected 0.7% contraction in industrial production and manufacturing in October, further fuelling fears of a double-dip recession.

It followed warnings from Bank Governor Sir Mervyn King that the UK faces a "systemic crisis" and that banks should brace themselves for a potential eurozone collapse amid fears of a second credit crunch.

The CBI's chief economic adviser, Ian McCafferty, said: "Developments in the eurozone remain the key risk to the UK's economic prospects. While there are encouraging signs that progress will be made at this week's summit, it's clear that the situation is at a critical juncture."

Holding interest rates will be welcomed by borrowers, but the extended period of lower lending costs spells more misery for pensioners and savers, who will continue to suffer low returns on their money at a time when high inflation is eroding the value of their deposits.

Sport
sportGareth Bale, Carl Froch and Kelly Gallagher also in the mix for award
News
Japan's Suntory Beverage & Food has bought GlaxoSmithKline's Lucozade and Ribena
news
News
A tongue-eating louse (not the one Mr Poli found)
newsParasitic louse appeared inside unfilleted sea bass
Life and Style
Out and about: for 'Glee' character Bert Hummel, having a gay son was a learning curve
lifeEven 'cool' parents need help parenting gay teens
PROMOTED VIDEO
News
ebooksNow available in paperback
Money
Anyone over the age of 40 seeking a loan with a standard term of 25 years will be borrowing beyond a normal retirement age of 65, and is liable to find their options restricted
propertyAnd it's even worse if you're 40
Arts and Entertainment
Perhaps longest awaited is the adaptation of Jack Kerouac’s On the Road with Brazil’s Walter Salles directing and Sam Riley, Kristen Stewart and Viggo Mortensen as the Beat-era outsiders
books
Arts and Entertainment
theatreSinger to join cast of his Broadway show after The Last Ship flounders at the box office
Life and Style
fashion'To start singing with Pharrell is not that bad, no?'
News
news
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

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

iJobs Job Widget
iJobs Money & Business

Argyll Scott International: Risk Assurance Manager

Negotiable: Argyll Scott International: Hi All, I'm currently recruiting for t...

Argyll Scott International: Business Analyst - MGA - London Market - Insurance Broker

£50000 - £60000 per annum + benefits: Argyll Scott International: A Business A...

Ashdown Group: PR, Marketing & Events Executive - Southwark, London - £35,000

£30000 - £35000 per annum + benefits: Ashdown Group: PR Marketing & Events Exe...

Selby Jennings: C++ Developer – Hedge Fund – New York

$80000 - $110000 per annum, Benefits: Bonus and Employee Investment Scheme: Se...

Day In a Page

In a world of Saudi bullying, right-wing Israeli ministers and the twilight of Obama, Iran is looking like a possible policeman of the Gulf

Iran is shifting from pariah to possible future policeman of the Gulf

Robert Fisk on our crisis with Iran
The young are the new poor: A third of young people pushed into poverty

The young are the new poor

Sharp increase in the number of under-25s living in poverty
Greens on the march: ‘We could be on the edge of something very big’

Greens on the march

‘We could be on the edge of something very big’
Revealed: the case against Bill Cosby - through the stories of his accusers

Revealed: the case against Bill Cosby

Through the stories of his accusers
Why are words like 'mongol' and 'mongoloid' still bandied about as insults?

The Meaning of Mongol

Why are the words 'mongol' and 'mongoloid' still bandied about as insults?
Mau Mau uprising: Kenyans still waiting for justice join class action over Britain's role in the emergency

Kenyans still waiting for justice over Mau Mau uprising

Thousands join class action over Britain's role in the emergency
Isis in Iraq: The trauma of the last six months has overwhelmed the remaining Christians in the country

The last Christians in Iraq

After 2,000 years, a community will try anything – including pretending to convert to Islam – to avoid losing everything, says Patrick Cockburn
Black Friday: Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Helpful discounts for Christmas shoppers, or cynical marketing by desperate retailers?

Britain braced for Black Friday
Bill Cosby's persona goes from America's dad to date-rape drugs

From America's dad to date-rape drugs

Stories of Bill Cosby's alleged sexual assaults may have circulated widely in Hollywood, but they came as a shock to fans, says Rupert Cornwell
Clare Balding: 'Women's sport is kicking off at last'

Clare Balding: 'Women's sport is kicking off at last'

As fans flock to see England women's Wembley debut against Germany, the TV presenter on an exciting 'sea change'
Oh come, all ye multi-faithful: The Christmas jumper is in fashion, but should you wear your religion on your sleeve?

Oh come, all ye multi-faithful

The Christmas jumper is in fashion, but should you wear your religion on your sleeve?
Dr Charles Heatley: The GP off to do battle in the war against Ebola

The GP off to do battle in the war against Ebola

Dr Charles Heatley on joining the NHS volunteers' team bound for Sierra Leone
Flogging vlogging: First video bloggers conquered YouTube. Now they want us to buy their books

Flogging vlogging

First video bloggers conquered YouTube. Now they want us to buy their books
Saturday Night Live vs The Daily Show: US channels wage comedy star wars

Saturday Night Live vs The Daily Show

US channels wage comedy star wars
When is a wine made in Piedmont not a Piemonte wine? When EU rules make Italian vineyards invisible

When is a wine made in Piedmont not a Piemonte wine?

When EU rules make Italian vineyards invisible