ECB cuts interest rates to record low as recession lingers

The European Central Bank cut its key interest rate to a record low as the 17-nation euro region struggles to emerge from recession.

Policy makers meeting in Bratislava today lowered the main refinancing rate to 0.5% from 0.75%, a move predicted by 45 of 70 economists in a Bloomberg News survey. The ECB kept the deposit rate at zero and reduced the marginal lending rate to 1% from 1.5% to preserve a symmetrical rate corridor. President Mario Draghi holds a press conference in the Slovakian capital at 2:30 p.m.

Since Draghi said last month that he stood ready to act if Europe’s economic outlook worsened, inflation plunged, economic confidence slumped and unemployment rose. Today’s cut, the first since July last year, takes the ECB closer to exhausting its conventional policy tools, raising the prospect of a negative deposit rate or new non-standard measures.

The rate cut “will not have any significant impact on short-term interbank rates,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. However, it will “reduce funding costs for the mainly peripheral banks that use the ECB’s lending facilities, so in that sense it is a targeted move.”

Market Bets

The euro rose half a cent after the decision and traded at $1.3190 at 2:14 p.m. in Frankfurt. Investors had increased bets on a drop in the cost of borrowing at today’s meeting. Spanish government bonds extended an eight-month gain last week, the cost of insuring against default on European corporate debt fell and European stocks posted the biggest increase in five months.

Expectations for a rate reduction and speculation the U.S. Federal Reserve would affirm its commitment to bond purchases helped push the euro to a two-month high of $1.3243 yesterday. The Fed yesterday pledged to keep buying bonds at a pace of $85 billion a month and said it’s ready to raise or lower that level as economic conditions evolve.

“A cut in the main refinancing rate alone will not get the job done,” said Marchel Alexandrovich, senior European economist at Jefferies International Ltd. in London. “Without a commitment to new unconventional measures, the meeting would prove yet another disappointment.”

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