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ECB ready to slash interest rates again

THE EUROPEAN Central Bank (ECB) is ready to cut interest rates even further if the economic outlook across the euro area worsens.

Both ECB president Mario Draghi and executive board member Benoit Couere commented on the possibility yesterday, only days after the central bank reduced its benchmark borrowing rate by a quarter of a point to a record low of 0.5pc.

Mr Draghi, departing from a prepared speech, emphasised the central bank's readiness to cut interest rates again if the euro zone economy deteriorates further.

"We will be looking at all the data that arrives from the euro-area economy in the coming weeks and if necessary, we are ready to act again," he said in Rome.

In a separate interview his colleague Mr Coeure said: "It's a historic low and we'll cut again if indicators confirm the situation is deteriorating." He urged EU governments to work together to revive growth without giving up on the effort to trim deficits.

"Of course, we need a strategy for returning to growth," Mr Coeure said. "That doesn't mean we need more spending. Creating more debt is not going to solve the problem of growth in Europe."

Mr Draghi also said that officials have an "open mind" about taking the rate of interest earned on ECB deposits, currently at zero, into negative territory.

This would mean the ECB would charge banks in return for holding their funds overnight, a step it says it is technically ready for, but which could have major implications on funding markets.

"The governing council has decided for the first time to look openly at the possibility of reducing the interest rate on the deposit facility to less than zero," said Mr Draghi. "There are many complications. There are many consequences that we must take into account and study closely. The governing council has decided to analyse these consequences in order to be ready to act if needed."

He said this decision was supported by the fact that "macro-economic weakness has spread to parts of the euro area where so far the transmission of monetary policy has never been questioned."

This follows last week's news that the eurozone economy will shrink more than previously estimated in 2013, in a two-year slump that has driven unemployment to a record high.

To help ensure its low rates are reaching the parts of the economy that need them, the ECB also announced last week that it will continue to provide banks with as much liquidity as they want until at least mid-2014, and that it is working with European institutions to encourage lending.

Irish Independent