European Central Bank cuts rates to historic low

May 7th, 2009 - 7:57 pm ICT by IANS  

Frankfurt, May 7 (DPA) The European Central Bank (ECB) has cut rates to an historic low of 1 percent Thursday with the ECB also expected to announce plans to mobilize new monetary tools to try to conquer the prevailing economic crisis.
The 25-basis-points cut in the cost of the money in the 16-member eurozone followed signs of division emerging in the ECB’s 22-head rate-setting council on what new measures the bank should pursue to help spur economic growth.

The ECB has now delivered rate cuts totalling 325 basis points since October as inflation has dwindled and unemployment has jumped in the wake of the dramatic contraction in the world economy.

ECB chief Jean-Claude Trichet is expected to set out at a press conference Thursday the so-called unconventional action the bank plans to use to tackle the economic crisis.

“The ECB’s day of reckoning has arrived,” said John Higgins, economist with the economics research group Capital Economics.

Thursday’s meeting follows criticism of the ECB for its relatively cautious response to the global recession with other leading central banks such as the US Federal Reserve and the Bank of England (BoE) having moved quickly to trim rates and mobilize non-standard measures to help break the credit crunch.

Both the US monetary authorities and the BoE have already reduced rates to about as low they are likely to go - between zero and 0.25 percent in the case of the US and 0.5 percent in Britain.

Meeting in London, the BoE Thursday announced it had left interest rates unchanged at 0.5 percent but said it would increase its programme of quantitative easing (QE) to 125 billion pounds ($188.5 billion).

The QE scheme, under which the central bank aims to boost liquidity by buying up bank and corporate assets - in effect printing money - was adopted earlier this year with an initial 75 billion pounds.

The possible measures Trichet is expected to unveil Thursday include the purchase of assets from banks to bolster the amount of money in the economy or, more likely, extending the period over which the ECB lends funds to banks at fixed rates.

Figures released in the run-up to Thursday’s meeting showed eurozone industrial producer prices chalking up their biggest drop in 22 years in March. Economists also expect eurozone inflation to sink further from its current low of 0.6 percent.

But in reaching its decision Thursday, the ECB’s governing council also had to strike a balance between often disastrous hard economic data and a slew of forward-looking indicators pointing to an economic pickup emerging in the run-up to the end of the year.

Data released while the ECB governing council was deliberating in Frankfurt showed German factory orders posting a surprise jump in March, in what is one of the first signs of a pickup in key hard data for Europe’s biggest economy since it slumped into recession last year.

The European Commission Monday slashed its economic projections, saying Europe’s economy would shrink by four percent this year, doubling what was then thought to be the dire predictions it made at the start of the year.

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