ECB cuts interest rates to historic low

The European Central Bank has reacted to market pressures by lowering borrowing costs for loans by 25 basis points. The record-low interest rate of 0.75 percent is intended to support a deteriorating eurozone economy.

The European Central Bank (ECB) on Thursday trimmed its interest rate to a mere 0.75 percent after already lending money at historically low rates of 1.0 percent. It is the third time that ECB Chief Mario Draghi has agreed to a rate cut since taking over as the head of the bank in November of last year.

The move had been anticipated by most market analysts and came in a bid to assist the ailing economies in the 17-member euro area. But experts warned the rate cut could only have a temporary effect.

"It's not so much about the real effect that the move will have," Nordea Analyst Aurelija Augulyte told Reuters news agency. "It's more a psychological game of trying to be supportive of sentiment."

DW.DE

ECB's rate cut provides no lasting market signal

For the first time since the euro was born, the ECB's main interest rate has dropped below 1.0 percent. But DW's Rolf Wenkel claims in his commentary that monetary policy cannot take the place of business cycle policy. (05.07.2012) 

Nonetheless, the cut will be welcomed particularly by southern European banks which have tapped the ECB heavily for loans in the past. The 25-basis-point yield reduction could decrease annual interest payments from the 1.0 trillion euros ($1.253 trillion) in three-year loans by about 2.5 billion euros.

Rate cut enough?

The ECB has been under pressure from investors and the International Monetary Fund to take even bolder measures, including the resumption of government bond purchases. IMF Chief Christine Lagarde has questioned the wisdom of cutting rates further and urged the ECB to buy sovereign debt bonds of the most distressed eurozone nations.

The European Central bank defended its policy, saying that the rate cuts were justified with a view to guaranteeing price stability in the medium term.

Also on Thursday, the Bank of England (BoE) pumped another 50 billion pounds ($78 billion, 62.34 billion euros) into the domestic economy under its quantitive easing program.

The scheme involves purchasing government assets and has now swollen to a total of 375 billion pounds. BoE left its own interest rate unchanged at 0.5 percent.

hg/mz (Reuters, dpa)
http://www.dw.de/dw/article/0,,16074120,00.html