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Thursday 18 September 2014

ECB cuts rate to record low of 0.5%

Published 02/05/2013 | 13:24

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The European Central Bank has cut its benchmark interest rate to a record low amid fears about the eurozone's bid to recover from recession
The new headquarters of the European Central Bank under construction in Frankfurt (AP)

The European Central Bank has cut its key interest rate to a historic low and extended unlimited cheap loans to banks to try to help the flagging euro area economy climb out of a stubborn recession.

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The bank's governing council lowered the benchmark refinancing rate to 0.50% from 0.75% and ECB President Mario Draghi left open the possibility of cutting rates even further.

And the bank extended its all-you-want policies on its regular loans to banks. That means lenders can get as much funding as they feel they need at the bank's low rate, until at least July of next year.

Yet Mr Draghi had only a sketchy proposal of how to solve what he and other bank officials say is the real problem: that the bank's low rates aren't being passed on to small and medium-sized companies in heavily indebted countries that could use such stimulus the most.

He said that ECB officials were working with the European Union's executive commission and the European Investment Bank lending agency about creating a market for securities backed by loans to businesses, a step that could free up more money for lending. Small businesses are key because they provide most of the jobs in the eurozone.

Most economists had expected a cut after recent economic indicators gave alarming signs that the ECB's prediction for a recovery by year-end might not be coming true. Mr Draghi stuck with that prediction but said there were risks that "could dampen confidence and delay the recovery".

Mr Draghi only added the bank would "look at all the incoming data, monitor them closely, and stand ready to act if needed" - language similar to that which preceded Thursday's cut.

He also warned that governments could derail the recovery if they fail to take steps to right their finances and make their economies more business-friendly, such as by cutting excessive regulation on hiring and firing.

Press Association

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