Bank cuts interest rate in bid to revive eurozone

ECB President Mario Draghi held out the prospect more help was on the way.

The bank’s governing council lowered the benchmark refinancing rate to 0.50 per cent from 0.75 per cent and Mr Draghi left open the possibility of cutting rates even further.

The move comes amid fears the eurozone economy may not recover later in the year from its recession.

The central bank also extended its all-you-want policies on its regular loans to banks. That means lenders can get as much funding as they feel they need at the bank’s low rate, until at least July of next year.

Yet Mr Draghi had only a sketchy proposal of how to solve what he and other bank officials say is the real problem: that the bank’s low rates aren’t being passed on to small and medium-sized companies in heavily indebted countries that could use such stimulus the most.

In theory, a cut helps companies by lowering borrowing costs for banks that have borrowed from the ECB so they could loan more. It also signals the ECB’s willingness to support the economy.

Mr Draghi said that ECB officials were working with the European Union’s executive commission and the European Investment Bank lending agency about creating a market for securities backed by loans to businesses, a step that could free up more money for lending. Small businesses are key because they provide most of the jobs in the eurozone.

Most economists had expected a cut after recent economic indicators gave alarming signs that the ECB’s prediction for a recovery by year-end might not be coming true.

Mr Draghi stuck with that prediction but said there were risks that “could dampen confidence and delay the recovery”.

Mr Draghi only added the bank would “look at all the incoming data, monitor them closely, and stand ready to act if needed” – language similar to that which preceded yesterday’s cut.

He also warned that governments could derail the recovery if they fail to take steps to right their finances and make their economies more business-friendly, such as by cutting excessive regulation on hiring and firing.

Mr Draghi said that the ECB was prepared to cut interest rates further should conditions make it necessary. He also said the central bank was “technically ready” for negative deposit rates.

The euro fell sharply on the comments, losing 0.6 per cent against the pound to 84.135p, edging it towards the recent low of 83.98p that it reached on April 26. Against the dollar, the euro fell below $1.31.

The interest rate cut helped shore up markets despite concerns over the state of the US and China economies, the world’s two biggest. In recent months there have been growing calls for European countries to move away from austerity measures, which critics say are stifling growth. Instead there are calls for a greater focus on stimulus measures.

Both French President Francois Hollande and newly-elected Italian Prime Minister Enrico Letta have urged a reconsideration of austerity policies.

Governments in Europe are cutting spending and raising taxes to deal with problems with too much debt, hurting growth. Unemployment is at 12.1 per cent, the highest since the euro’s launch in 1999.