ECB cuts main interest rate to new record low of 0.5%

Thursday 02 May 2013 23.56
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ECB chief Mario Draghi says bank stands ready to act if needed
ECB chief Mario Draghi says bank stands ready to act if needed
ECB makes first rate cut since July 2012
ECB makes first rate cut since July 2012

European Central Bank President Mario Draghi has not ruled out more central bank action to help the lagging euro zone economy - even after the bank cut its key benchmark to a historic low.

Mr Draghi said today that the ECB would monitor all indicators and officials "stand ready to act if needed."

He did not specify what action might be taken but the remark appeared to leave open the possibility the ECB could cut rates even further.

Earlier, the European Central Bank cut interest rates for the first time in 10 months, driven to act by an economy in recession and freed to do so by sharply falling inflation.

The ECB lowered its main interest rate by a quarter point to a new record low of 0.5% in response to a drop in inflation well below its target level, and rising unemployment.

Today's meeting was held in Bratislava in Slovakia instead of the ECB headquarters in Frankfurt - one of two meetings it holds outside of Germany each year.

The European Central Bank head said he was sticking with his forecast that the struggling euro zone economy will start to grow later this year. He said the bank's low interest rates will help the economy "stabilise and recovery gradually in the second half of the year."

Mr Draghi said, however, there were risks to the recovery if governments did not move to reform their economies and become more business-friendly.

He also said the bank is working with other European institutions to find a way to get more credit to small and medium size companies - and spur a lagging economy.

Mr Draghi said the consultations would focus on creating a market for securities backed by loans to companies.

Talks with the European Commission and the European Investment Bank would focus on finding a way to package and guarantee such loans as a way to free up more lending, Draghi added.

Weak data bolstered case for rate cut

Economic data over the last month have bolstered the case for action, with unemployment hitting a record high in April, when inflation saw its biggest monthly drop in over four years, to 1.2%.

The sharp drop in inflation, from 1.7% in March, pressured the ECB to cut rates to honour its mandate to deliver price stability, which it defines as inflation close to but below 2%.

The sudden slump in price pressures has also raised the possibility of the ECB having to look at policy tools beyond interest rates to counter any further slide in inflation.

The ECB wants to improve the transmission of its monetary policy so its low rates reach all corners of the euro zone. The bloc's south is not benefiting to the same extent as the north from the ultra-low rates. If they are lending at all, banks there are charging companies and households more for loans than their peers in the north because of higher funding costs and credit risks.

The ECB has repeatedly voiced its concern about the impact this has on lending to small and medium-sized enterprises (SMEs), which have little alternative to bank funding and are a key engine for growth in the currency bloc.

It has said it is studying options to address the problem, but little is expected to have been decided at today's policy meeting.

Some ECB policymakers are reluctant to try to fix too many of the euro zone's problems, eager to push onto governments the issue of dealing with SME lending. Draghi must balance this reluctance with the pressure for action.

In Germany, the ECB has even faced resistance to a rate cut. German Chancellor Angela Merkel said last week the ECB would have to raise rates if it were looking at Germany alone.

German insurers and the county's dominant savings and cooperative banking sector have also joined up to speak out against looser ECB monetary policy, saying it would have little economic impact and undermined savings needed to protect the country's rapidly ageing population.