Eurozone rates cut to record 1% low
The European Central Bank (ECB) today pulled out all the stops in its drive to shore-up the slumping eurozone economy by cutting interest rates to a record 1 per cent low and embarking on further ground-breaking, aggressive measures.
The ECB’s move to cut eurozone rates by a further quarter-point to the lowest level since the creation of the single currency in 1999 was widely expected by economists.
Most analysts expect the move to be a final cut from the ECB, after a series of signals from its top officials that it does not want to go further for a range of technical reasons.
But market attention was trained on a radical move by the ECB to follow the lead set by the Bank of England and US Federal Reserve and begin a form of so-called “quantitative easing”. This involves buying up financial assets to pump more cash and credit through the eurozone economy, and drive down commercial interest rates.
The ECB’s proposed measures stop short of those deployed by the Fed and Bank of England since they will not involve buying government bonds.
Instead, the ECB will focus its efforts on buying covered bonds, a form of corporate debt. It signalled an initial programme worth “around 60 billions euros”.
The ECB said it had now taken the decision to begin the bond purchases in principle and would unveil details of how the scheme will operate after its Governing Council meets again on June 4.
It coupled the move with a another, widely predicted concession to further boost its lending to cash-strapped eurozone banks. The ECB already lends unlimited amounts to banks when they request funds, but it now send it would extend to duration of these loans from six to twelve months.
“The Governing Council has decided today to proceed with its enhanced credit support approach,” Jean-Claude Trichet, the ECB’s President said.
“These decisions have been taken to promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help improve market liquidity in important segments of the private debt security market, and to ease funding conditions for banks and enterprises.”
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