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ECB lowers key interest rate

Fri., May 3, 2013

FRANKFURT, Germany – The European Central Bank cut its key interest rate to a record low 0.50 percent Thursday and announced other measures to help lift the euro area out of a stubborn recession.

The bank also extended its offer of unlimited, cheap loans to banks at least through July 2014. Previously, the ECB had planned to end the program as soon as this July

The ECB lowered its benchmark refinancing rate from 0.75 percent, as expected, at a meeting of its rate-setting council in Bratislava, Slovakia.

ECB President Mario Draghi indicated he was prepared to flex its muscles further in the face of high and rising unemployment and growing evidence that Europe’s economy is getting weaker. He said the ECB stood “ready to act if needed.”

Eager to jolt banks into lending more freely, Draghi said the ECB would even consider charging banks to deposit funds with the ECB by lowering their deposit rate into negative territory from the current zero percent. That would make room to cut the refinancing rate again because the bank likes to keep some space between the two rates.

Together, the measures announced by the ECB Thursday amounted to a grim recognition: despite record-low interest rates, European banks still remain cautious about lending to consumers and businesses, while some companies don’t want to risk borrowing in a slow economy.

Draghi also delivered a warning to Europe’s political leaders: Extraordinary actions by the central bank will not be enough to heal the region’s economy. Governments need to accelerate efforts to cut excessive regulations and make Europe a more hospitable place for business.

The economy of the 17 European Union countries that use the euro certainly needs a boost. The ECB says the eurozone will shrink 0.5 percent for all of this year and unemployment is at 12.1 percent.

Many economists say clogged lending to small companies meant Thursday’s cut will not do much good. Marie Diron, senior adviser to Ernst & Young, said her assessment was “slight disappointment that the ECB has done the bare minimum.”


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