ECB surprises with rate cut, cautious on bond buys

Thu Nov 3, 2011 3:12pm EDT
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By Eva Kuehnen

FRANKFURT (Reuters) - The European Central Bank cut interest rates by a quarter point to 1.25 percent in a surprise move on Thursday and President Mario Draghi said the euro zone could subside into a "mild recession" in the latter part of 2011.

The Italian has walked into a maelstrom in his first week at the ECB's helm, with euro zone leaders contemplating a future without Greece and economic policy paralysis in his home country threatening to pitch Rome into the storm.

But he offered no commitment to scale up the central bank's bond-buying program to support the likes of Italy and Spain, instead describing the purchase plan as "limited."

"What we are observing now is ... slow growth heading toward a mild recession by year-end," Draghi told a news conference at which he used some of his predecessor Jean-Claude Trichet's lines, while mixing in a dash of humor in an assured debut.

"A significant downward revision to forecasts and projections for average real GDP growth in 2012 (are) very likely," he added.

The rate cut, which Draghi said was a unanimous decision by the ECB's 23-member Governing Council, gave a boost to stock markets. The FTSEurofirst 300 index of top European shares closed up 1.9 percent.

A Reuters poll of 51 economists conducted after the rate move showed there is a 50-50 chance the ECB will cut interest rates again before the end of 2011.

The decision came despite inflation in the 17-country euro zone staying at 3.0 percent for a second month running in October, well above the ECB's target of just below 2 percent.   Continued...

<p>The European Central Bank President Mario Draghi reacts during his first news conference in Frankfurt, November 3, 2011. REUTERS/Alex Domanski</p>