European Central Bank Cuts Rates to New Low; Bank Leaders Take Action in Hopes of Easing Financial Crisis Affecting Eurozone Economy

St Louis Post-Dispatch (MO), July 6, 2012 | Go to article overview

European Central Bank Cuts Rates to New Low; Bank Leaders Take Action in Hopes of Easing Financial Crisis Affecting Eurozone Economy


FRANKFURT, Germany - The European Central Bank cut its key interest rate by a quarter percentage point Thursday to a record low 0.75 percent to try to help ease Europe's financial crisis and boost its sagging economy.

The action, which was widely expected, is meant to make it cheaper for businesses and consumers to borrow and spend money. But experts said that fear over the economy was so high in Europe that the cut might only have limited effect.

In a more surprising move, the ECB cut the interest rate it pays banks on overnight deposits by a quarter percentage point - to zero. This pushes banks to lend the money, rather than sock it away with the ECB.

ECB President Mario Draghi said the eurozone economy would recover only gradually. Some of the risks foreseen from the debt crisis had already materialized, pushing the bank to act, he said.

Analysts warned the rate cut might do little to jolt the eurozone economy back to life, however. Borrowing rates are already low, but businesses and households are not spending money because they are afraid of the economic outlook.

Draghi said there is more the ECB could do to stimulate growth - "we still have all our artillery ready" - and that low inflation gives the bank more wiggle room. However, he suggested no further actions were imminent.

Stock markets initially rose after the news, but the gains faded as investors worried about a slowdown in the global economy. Germany's DAX stock index fell 0.5 percent and the Dow 0.2 percent. The euro was down 1.1 percent at $1.2380.

"Today's ECB interest rate cut does little to alter the bleak economic outlook," said Jennifer McKeown, analyst at Capital Economics.

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