By Usman Ahmed
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BRUSSELS: The European Central Bank (ECB) on Thursday cut its benchmark interest rate to a record low in May to strengthen deteriorating growth in the Euro-zone region.
The ECB delivered a 25 bp rate cut, taking the refi rate to 0.50%, broadly in line with market expectations. The central bank left the deposits rate unchanged at 0.0% and cut 50 bp the lending rate to 1.0%. ECB president Mario Draghi was to comment on the decision at a press conference later in the day.
Market participants will scrutinize Draghi’s comments for clues in regards to the central bank’s next course of action in dealing with an ongoing sovereign debt crisis.
A rate cut “is unlikely to be the end of the easing story for the ECB,” Frederik Ducrozet, an economist at Credit Agricole CIB in Paris, said before the announcement. “Weak growth and rapidly falling inflation provide a justification for bolder action.”
Meanwhile, Economic confidence as measured by the European Commission dropped to its lowest level since December, suggesting business executives and consumers doubt that Draghi’s predicted recovery this year will actually materialize.
On top of that, unemployment in the 17-member euro area rose to a fresh record of 12.1 percent in March and manufacturing output contracted for a 21st month in April.
Market participants will scrutinize Draghi’s comments for clues in regards to the central bank’s next course of action in dealing with an ongoing sovereign debt crisis.
A rate cut “is unlikely to be the end of the easing story for the ECB,” Frederik Ducrozet, an economist at Credit Agricole CIB in Paris, said before the announcement. “Weak growth and rapidly falling inflation provide a justification for bolder action.”
Meanwhile, Economic confidence as measured by the European Commission dropped to its lowest level since December, suggesting business executives and consumers doubt that Draghi’s predicted recovery this year will actually materialize.
On top of that, unemployment in the 17-member euro area rose to a fresh record of 12.1 percent in March and manufacturing output contracted for a 21st month in April.
So far we haven’t seen any improvement in the situation,” Draghi said at a press conference in Washington on April 19.
“The central arguments for a rate cut are the persistently weak economic confidence indicators that don’t point to a rapid recovery, and the increasing danger of undesirably low inflation rates,” said Kristian Toedtmann, senior economist at DekaBank in Frankfurt. “We see an interest-rate move as more than just a cosmetic maneuver. It would keep long-term money-market rates low or even lower them further.”
Still, with economies like Spain and Italy stuck in recession and their banking systems wary of taking on more risk, today’s rate cut may not automatically pass through to companies and households wanting to invest.
Following the announcement, the euro trimmed losses against the U.S. dollar, with EUR/USD shedding 0.1% to trade at 1.3166.
Meanwhile, European stock markets remained mixed. The EURO STOXX 50 rose 0.1%, France’s CAC 40 shed 0.2%, Germany’s DAX advanced 0.2%, while London’s FTSE 100 dipped 0.2%.
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