Eurozone interest rates cut again as ECB matches Bank of England
Friday 03 May 2013
The European Central Bank's president, Mario Draghi, slashed interest rates to a historic low yesterday as the central bank hinted at new initiatives to boost loans to small businesses and pledged to extend cheap funds to banks.
The quarter-point cut, against the backdrop of a persistent eurozone recession and record unemployment, brings the cost of borrowing to 0.5 per cent, on a par with the Bank of England. Mr Draghi said the ECB "stood ready to act" on further cuts if needed.
Most economists expected a cut after signs that the ECB's prediction for a recovery by the end of the year might not emerge. Mr Draghi warned that there were risks that "could dampen confidence and delay the recovery."
Lenders will be able to borrow as much as they want at the ECBs low refinancing rate until at least July next year, to ensure that liquidity is not a barrier to banks lending cash.
"There can't be fears of lack of funding as an excuse for not lending," Mr Draghi said following the council's meeting in Bratislava.
The central bank is launching a consultation with other European institutions to kick-start a market for asset-backed bonds backed by private-sector loans in a bid to free up money for lending.
Business loans have contracted and household credit is virtually stagnant this year according to the ECB's recent bank lending survey.
"The survey on the access to finance of small and medium-sized enterprises in the euro area indicates continued tight credit conditions, particularly for SMEs [small and medium-size enterprises] in several euro-area countries. Moreover, the available information indicates high-risk perception on the part of banks," Mr Draghi added.
Experts were disappointed by the lack of detail in Mr Draghi's plans and warned that the consultation could take a long time to bear fruit. Capital Economics' Jennifer McKeown said: "It's worrying that the discussion is in its initial stages and that they are far from reaching any conclusions. After all, this crisis has been going for years now. It's also disappointing that the ECB seems unwilling to buy any assets itself."
Mr Draghi also sent the euro lower by hinting that the ECB could charge banks to park money with it by cutting the deposit rate below zero, adding: "We are technically ready. There are several unintended consequences that may stem from this measure, but we will address and cope with these consequences if we decide to act.
"We will again look at this with an open mind and we stand ready to act if needed."
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