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Europe

ECB cuts target rate to 1.5%, a record low

Latest update : 2009-03-05

In an effort to restore European economies to health, the European Central Bank reduced its main lending rate to 1.5% from 2%.

AFP - The European Central Bank (ECB) kicked off a period of record low interest rates on Thursday by cutting its benchmark level to 1.50 percent in a bid to jumpstart the recession-hit eurozone economy.
   
In London, the Bank of England (BoE) cut its main lending rate to 0.50 percent, an all-time low for the 315-year-old institution as well.
   
ECB president Jean-Claude Trichet was also expected to revise growth and inflation forecasts by central bank staff lower, in particular with an estimate for a sharp contraction of the 16-nation eurozone economy this year.
   
At a press conference following the rate decision, analysts were to monitor Trichet's comments for signs the ECB is set to begin quantitative easing -- essentially running money printing presses overtime -- to encourage activity.
   
The BoE said it was ready to use such policies to spur the British economy, which is also in recession.
   
In announcing its decision, the ECB also revised two other key interest rates -- its deposit rate and marginal lending rate -- to 0.50 percent and 2.50 percent respectively.
   
Estimates for economic activity this year and next were widely expected to come in for sharp downgrades as the global downturn bears down on eurozone exports and investment and drives up unemployment.
   
December's growth estimate was deemed obsolete almost upon its release and the previous mid-point forecast of a 0.5 percent contraction this year could fall to minus 2.0 percent or lower, analysts say.
   
In addition to an "obviously strong downward revision for GDP" (gross domestic product), Natixis bank economist Cedric Thellier said the previous 2009 inflation forecast of 1.4 percent would be slashed in half to 0.7 percent.
   
The ECB has cut its main rate five times from an early October level of 4.25 percent, but at 1.50 percent it is still well above that of other major central banks.
   
The US Federal Reserve and Bank of Japan's main rates are essentially already at zero, and the Fed has begun to buy commercial paper directly from businesses in a classic example of quantitative easing (QE).
   
With influential ECB governor Axel Weber, who is also head of the German central bank, suggesting eurozone rates will go no lower than 1.0 percent, analysts wonder what the central bank will do to stimulate the economy.
   
Eurozone GDP shrank 1.5 percent in the last quarter of 2008 and is forecast to slump further early this year, while inflation remains tame at 1.2 percent, well below the ECB's target of just under 2.0 percent.
   
The option of buying commercial paper is less clear-cut for the ECB, which must operate in 16 separate countries, but Trichet should nonetheless address the QE issue during his press conference.
   
Capital Economics economist Jennifer McKeown did not expect firm details from the bank president however, and warned that wavering could lead to a longer recession in the 16-nation bloc.
   
"The bank will still be relatively vague about the scope for unconventional measures to support the economy when interest rates can fall no further," she said.
   
"This raises the danger that the eurozone recession might be longer-lived than elsewhere."

Date created : 2009-03-05

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