The European Central Bank has cut its main interest rate to a new record low of 1% and announced that it will buy up bonds for the first time. The moves are its latest in a bid to halt the euro zone's economic decline and shore up shaky financial markets.
The quarter-point rate cut from 1.25% was its seventh since October and was widely expected. ECB president Jean-Claude Trichet later told reporters the rate was not necessarily at its lowest level. 'We have not decided that the new level of our policy rates, the present level, was the lowest level that we could cross, whatever the future circumstances are,' Trichet said.
The ECB has stopped short of the massive asset purchase programmes being followed by the US Federal Reserve and the Bank of England.
It plans to spend about €60 billion buying covered bank bonds - securities issued by banks and backed by mortgages or other loans - but did not rule out expanding the programme into other types of assets down the track.
The ECB will also double the maximum term of its loans to banks to 12 months and prolong easier rules on the types of assets which can be used as security for loans in a three-pronged package of steps to complement its rate cuts.
The ECB said these decisions had been taken to encourage the continuing fell in money market interest rates, to encourage banks to maintain and expand their lending to customers and to ease funding conditions for banks and enterprises.
Mr Trichet declined to commit the ECB to keep interest rates at a low level for any particular period and said the bank would unwind its efforts to stimulate the economy when needed.
He said the ECB would announce details of its bond purchase plan at its June meeting, when it will also revise down economic projections for the euro zone.
The bank said the latest figures suggested 'tentative signs of a stabilisation at very low levels', after a first quarter which was significantly weaker than expected. The ECB said the world economy was still suffering a severe downturn. It said demand was likely to remain 'very weak' over 2009 before gradually recovering during 2010.
Some banks passing on rate cuts
A number of financial institutions have said they will pass on today's quarter-point interest rate cut to homeowners with variable rate mortgages. The European Central Bank cut rates to an all-time low of 1% earlier today.
The ECB rate cut has no impact for those with fixed rate home loans but reduces monthly tracker mortgage repayments by €13 for every €100,000 borrowed over 30 years. Since last October, the combined effect of rate cuts has reduced monthly repayments on a €300,000 mortgage by around €550.
Homeowners with variable rate loans from AIB, Permanent TSB, Bank Of Ireland, KBC Bank, ICS Building Society and EBS will benefit from today's cut.
But Ulster Bank and First Active will not pass the reductions on to variable rate mortgage holders. Halifax /Bank of Scotland says only customers with variable loans incorporating the bank's 'price promise' element will see the reductions passed on.
Others, including National Irish Bank and ACC, are reviewing the situation following the ECB announcement.
