The European Central Bank decided today to cut the key interest rate to the lowest level in history, while the 17-nation euro area is facing recession.
ECB Board met today in Bratislava and decided to reduce the basic interest rate for refinancing to 0.5% from 0.75%, a move anticipated by 45 of the 70 economists surveyed by Bloomberg.
ECB maintained at zero percent the interest for the deposits and it cut the lending rate to 1% from 1.5%, to preserve symmetry around the key interest rate.
Mario Draghi, the President of the European Central Bank said last week that he was ready to act if economic prospects worsen in Europe; since then the inflation has consistently dropped, the confidence of the business environment fell sharply and unemployment rose.
Analysts expect further action from the ECB. An interest rate cut is unlikely to be the end of the story for the ECB, says an economist at Credit Agricole in Paris. The rate cut “will not have any significant impact on short-term interbank rates,” but it will “reduce funding costs for the mainly peripheral banks that use the ECB’s lending facilities, so in that sense it is a targeted move,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam.
“A cut in the main refinancing rate alone will not get the job done. Without a commitment to new unconventional measures, the meeting would prove yet another disappointment,” said Marchel Alexandrovich, a senior economist at London-based Jefferies International Ltd.
The confidence in the economy as measured by the European Commission fell to the lowest level since December, suggesting that company executives and consumers doubt Mario Draghi’s prediction about a economic recovery this year.
Inflation dropped to 1.2 percent in April, the lowest level since February 2010 and consistently below the ECB’s 2 percent target.
Above all, Eurozone unemployment rose to a new high of 12.1% in March, and production in the manufacturing industry contracted for the 21th month in a row in April.
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