ECB cuts euro zone rates to 0.25% in surprise move

Friday 08 November 2013 10.40
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ECB cuts rates to 0.25% after a surprise drop in inflation last month
ECB cuts rates to 0.25% after a surprise drop in inflation last month
ECB President Mario Draghi says euro zone inflation set to remain low for a prolonged period of time
ECB President Mario Draghi says euro zone inflation set to remain low for a prolonged period of time

The European Central Bank cut interest rates to a new record low today, responding to a slump in inflation.

The ECB also said that banks would be able to rely on as much liquidity as they needed for longer in an effort to prevent the euro zone's recovery from stalling.

The 23-man Governing Council had faced intense market scrutiny after a shock slump in euro zone inflation to 0.7%in October - far below the ECB target of just under 2%.

"We may experience a prolonged period of low inflation to be followed by gradual upward movements towards an inflation rate of below but close to 2% later on," ECB President Mario Draghi told a news conference in Frankfurt.

"We have a whole range of instrument to activate before reaching the lower bound - in principle we could even cut further the interest rate," he said.

Calls from euro zone government ministers and industry for the ECB to loosen policy to help bring down the euro's exchange rate had also heaped pressure on the bank, though few analysts had expected a move this month.

The ECB cut its main refinancing rate by 25 basis point to 0.25%. It held the deposit rate it pays on bank deposits at 0% and cut its marginal lending facility - or emergency borrowing rate - to 0.75% from 1%.

Euro policymakers have played down the threat of Japan-style deflation, which led to a "lost decade" there, but appear to be taking no chances.

Draghi said there was general agreement on the need to act but there were differences over when to act.

All but one of the 23 money market traders polled by Reuters this week expected the ECB to remain on hold today, pending a clearer view about where euro zone inflation is heading. 

The ECB President reaffirmed the  bank's forward guidance that rates would hold at "present or lower levels" for an extended period and said he saw no threat of broad deflation. 

He also said banks would be able to rely on as much liquidity as they needed for longer, with the bank's main refinancing operations to be offered at fixed rate with "full allotment" at least until July 2015.

Adding to the ECB's dilemma over how to support a fragile recovery has been a fall in excess liquidity - cash beyond what lenders need to cover day-to-day operations - as banks repay three-year ECB loans, known as LTROs, early before a health check next year.

These early repayments are expected to push interbank lending rates higher over time and the ECB has been considering pumping more liquidity into the system to offset this development.

Draghi said there was no meaningful discussion about the need for a new LTRO at today's meeting.

The ECB last cut rates in May. Meanwhile, the Bank of England kept UK interest rates at record lows of 0.5% earlier today.

ECB President toasts Irish success on bailout programme

Mr Draghi has said that the Irish Government has to be congratulated for the country's progress in its bailout programme and the success of its actions.

But he cautioned that more action is needed in certain areas, especially in the banking sector.

Mr Draghi said that a decision on a credit line is entirely a matter for the Irish Government. He said that while the Troika would see it as "useful" in having a precautionary credit line in place, he does not want to interfere.

Noonan welcomes rate cut

Minister for Finance Michael Noonan has welcomed the decision by the European Central Bank to lower interest rates.

Mr Noonan said Ireland's model is export lead growth and the move will help the sector and the economy overall.

Mr Noonan said it will also help Ireland position in re-entering the markets.

He said: "It's a good decision, we welcome it. We wanted interest rates to go down and it helps our position going back into the markets as well because the spreads in Europe should narrow now."

Mr Noonan said today was an important one for Ireland as it marked the exit of the Troika.