European Central Bank
ECB cuts lending rate to historic low
By Sarah Collins in Frankfurt | Thursday 05 July 2012
The European Central Bank has dropped its main interest rates to record lows in a bid to ease borrowing costs for banks, businesses and households and inject new life into the eurozone economy in the midst of a double-dip recession and sovereign debt crisis. The bank’s three main rates all dropped 25 basis points, leaving the main lending rate at 0.75%, the overnight lending rate at 1.5% and the overnight deposit rate at an unprecedented 0%. ECB President Mario Draghi said the rate cut was “encouraging”. “It should make entrepreneurs think that their investment decisions, trade-offs are now improved, are now better,” he said, warning that the full effects of the rate cut depended on demand for credit by corporations and consumers. He also said that dropping both the main lending rate and the deposit rate at once could affect “expectations of further easing of monetary policy”. “This by itself has a positive effect, a stimulus effect,” he said.
The rate cut was the third since Draghi took office as ECB president in November last year, when he brought the main borrowing rate back down to a historic low of 1%, first seen in May 2009. Former ECB President Jean-Claude Trichet had raised the rate twice - in April and July 2011 - before he left office, despite a major market rout that sent yields (the interest investors receive) on bank and sovereign bonds in Spain and Italy soaring to record highs.
The rate cut comes on the back of a eurozone recession that is concentrated in Greece, Spain, Portugal and Italy. According to Eurostat, growth across the 17-member single currency bloc contracted by 0.1% in the first quarter of 2012, after falling 0.3% in the previous quarter. Economic growth in the eurozone continues to remain weak, with heightened uncertainty weighing on confidence and sentiment,” Draghi said after a meeting of the ECB’s Governing Council, on 5 July. The decision to cut rates was unanimous, he added.
The ECB has come back into the spotlight after a decision the EU summit, on 29 June, to hand it supervisory power over eurozone banks. However, it is still not clear what shape this would take - how many banks it would cover, where in the ECB’s structure the new supervisor would sit, and how the bank would retain an independent monetary policy. The Commission is due to make a proposal - in consultation with the ECB and the European Parliament - in the coming weeks or months. “Whatever the proposal is going to be, the ECB should be placed in a way to carry out the future tasks in an effective, rigorous and independent way, without risks for its reputation,” Draghi said. “The ECB should remain independent in carrying out this task,” he insisted. Finally, Draghi said that the latest summit has been a success because “leaders showed that this is a monetary union that is meant to last”.