ECB cuts interest rates, open to further action
Baku, May 10 (AZƏRTAC). The European Central Bank cut interest rates for the first time in 10 months on Thursday and held out the possibility of further policy action to support the recession-hit euro zone economy.
Responding to a drop in euro zone inflation well below its target level and rising unemployment, the ECB lowered its main rate by a quarter percentage point to a record low 0.50 percent.
ECB President Mario Draghi, promising to provide as much liquidity as euro zone banks need well into next year and to help smaller companies get access to credit, also indicated that some policymakers had pushed for a bigger cut.
The ECB was also "technically ready" to cut its deposit rate from the current zero percent into negative territory, meaning it would start charging banks for holding their money overnight.
Such a move could encourage the banks to lend out money rather than hold it at the ECB, though it would also probably have a big impact on banks` own operations and major implications for funding and bond markets.
Draghi said the ECB could cope with these - a departure from his previous statements. "There are several unintended consequences that may stem from this measure," he said of a negative deposit rate. "We will address and cope with these consequences if we decide to act. And we will again look at this with an open mind and we stand ready to act if needed."
Thursday`s cut in the main rate had been widely expected after Draghi said last month that the ECB stood ready to act, but few economists expect it to make a decisive difference.
Acknowledging that, the ECB said it would prime banks with as much liquidity as they need until at least July 2014 and look at ways to boost lending to smaller companies, which are the lifeblood of Europe`s economies but have been starved of credit in many countries. Draghi stuck with the ECB`s forecast that economic recovery will take hold later in the year but highlighted "downside risks" to that position.
The ECB would "monitor very closely" all incoming evidence, Draghi said, a phrase which in the past has suggested further policy action to come. Safe haven German Bund futures hit a new record high as Draghi spoke and the euro fell. Unemployment hit a record high in March and annual inflation plunged to 1.2 percent in April, pressuring the ECB to cut rates this month to honor its mandate to deliver price stability, which it defines as inflation close to, but below 2 percent.
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