Central banks shoot 45-minute stimulus salvo as growth slows

ECB Response

At 1:45 p.m. in Frankfurt, the ECB also cut its main rate by 25 basis points to a record low of 0.75 percent and said it will no longer pay anything on overnight deposits as it tries to prevent the sovereign debt turmoil from driving the 17-nation euro economy into recession. Both actions were anticipated by economists.

While President Mario Draghi has questioned the economic impact of lower interest rates, they could make it easier for banks to borrow and lend as well as build on the confidence boost euro-area governments delivered last week when they moved toward a deeper economic union. He said today that the central bank is not “running low on policy options,” without elaborating on what else it may do.

Elsewhere, Kenya’s central bank cut its benchmark lending rate for the first time in 18 months and Denmark’s lowered its main borrowing costs to record lows.

Downside Risks

U.S. and European stocks retreated as optimism with U.S. jobless claims data fizzled after Draghi said economic risks remain. The S&P 500 declined 0.8 percent as of 10:07 a.m. in New York, while the Stoxx Europe 600 Index fell 0.7 percent. Treasuries rose, with the 10-year yield falling 4 basis points to 1.587 percent.

Draghi told reporters that risks to the outlook remain “on the downside” and that heightened uncertainty is hurting confidence. Asked if there was any coordination with other central banks before today’s announcements, he said there “wasn’t any communication beyond the normal exchange of views.”

The steps by the U.K. and euro area will push JPMorgan Chase & Co.’s average interest rate for developed economies to a crisis-era low of 0.48 percent and add to the balance sheets of major central banks, which have already swelled 40 percent since mid-2007.

Today’s shifts come after the Fed expanded its Operation Twist program on June 20 to lower longer-term interest rates in financial markets. Data tomorrow is forecast to confirm the weakest quarter for U.S. employment in more than two years, evidence the world’s biggest economy has lost momentum.

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