ECB cuts interest rates, open to further action

Thu May 2, 2013 11:52am EDT
 
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By Michael Shields

BRATISLAVA (Reuters) - The European Central Bank cut interest rates for the first time in 10 months on Thursday and held out the possibility of further policy action to support the recession-hit euro zone economy.

Responding to a drop in euro zone inflation well below its target level and rising unemployment, the ECB lowered its main rate by a quarter percentage point to a record low 0.50 percent.

ECB President Mario Draghi, promising to provide as much liquidity as euro zone banks need well into next year and to help smaller companies get access to credit, also indicated that some policymakers had pushed for a bigger cut.

"There was a very, very strong prevailing consensus towards an interest rate cut," he told a news conference after the ECB's Governing Council met in Bratislava. "Within that, there was a prevailing consensus for a cut of only 25 basis points."

The ECB was also "technically ready" to cut its deposit rate from the current zero percent into negative territory, meaning it would start charging banks for holding their money overnight.

Such a move could encourage the banks to lend out money rather than hold it at the ECB, though it would also probably have a big impact on banks' own operations and major implications for funding and bond markets.

Draghi said the ECB could cope with these - a departure from his previous statements.

"There are several unintended consequences that may stem from this measure," he said of a negative deposit rate. "We will address and cope with these consequences if we decide to act. And we will again look at this with an open mind and we stand ready to act if needed."   Continued...

 
The Euro currency sign is seen in front of the European Central Bank (ECB) headquarters in Frankfurt April 4, 2013. REUTERS/Lisi Niesner