LONDON (Reuters) - The European Central Bank cut its main interest rate by 25 basis points to 1.25 percent on Thursday as the euro zone’s worsening debt crisis outweighed concern over persistently high inflation.
ECB President Mario Draghi will explain the Governing Council’s decision at a 1330 GMT news conference -- his first at a monetary policy meeting after taking over the reins on Tuesday from Jean-Claude Trichet.
“Given the fact that markets were expecting maybe a more prudent stance given the Italian ties of the new governor, a rate cut was priced in by December but not by November fully, so it’s an innovation in monetary policy and it has therefore produced a reaction in the market.”
”This is a complete surprise. We had expected a cut only in December. We thought it would take longer for the ECB to lower its overly optimistic economic forecasts.
“The move shows how unsettled the protectors of our currency are. They are taking very seriously the economic risks that stem from the sovereign debt crisis. The new ECB President Draghi is accepting that he will be labeled as an interest rate dove. That underlines the seriousness of the situation.”
”It’s a complete surprise. Most economists expected the ECB to lower rates sooner or later, because pressure on the financial markets increased as growth had slowed but inflation is still 3 percent.
”It was also seen as dangerous for (ECB President Mario) Draghi to set lower rates at his first meeting as it would have enforced the image of the Italian trying to go for an inflationary policy. It will only enforce that sentiment in Germany, the Netherlands and Finland and other core countries. In that sense it’s a huge surprise.
“I ask myself what he will say about the bond purchase program because Draghi made an important announcement there during the European summit, that the ECB would continue with purchasing bonds. Trichet lowered those expectations somewhat later, but I ask myself whether Draghi will now also have the boldness to also say here: the ECB will do what is necessary.”
”A nice surprise, we need these kinds of surprises these days. It shows that they will be looking at things from a very pragmatic point of view, so it’s very hard to say what the next move will be.
“I guess that the sharp economic slowdown, in particular in some countries, will lead them to consider cutting further, but I would be cautious before forecasting such a further cut. I guess the reaction will be very favorable.”
WILLIAM CHENEY, CHIEF ECONOMIST, MANULIFE ASSET MANAGEMENT, BOSTON
“This showed the tightening moves of the previous six months were a mistake. I think now it’s how not to lose credibility. It’s easier to wait for the new president to come in and do it, and the sooner the better given the state of the European economy. It is on the brink of a recession, which is not good for everybody.”
PETER BOOCKVAR, EQUITY STRATEGIST, MILLER TABAK + CO, NEW YORK
”In terms of impact, the move is more symbolic than anything as moving rates from 1.5 percent to 1.25 percent isn’t going to move the needle for a region that is suffering from structural economic stagnation and too much debt.
“Psychologically though, markets love it just as it loves every easing move by the Fed. Cheap money, party on.”
”What a starter. It is obvious that the ECB has caught the crisis virus and is trying everything it can to prevent a full-fledged recession.
“Now, the big question for the press conference is whether the ECB is also willing to do everything to prevent a further escalation of the sovereign debt crisis, becoming the unconditional lender of last resort of the euro zone.”
BRIAN DOLAN, CHIEF STRATEGIST, FOREX.COM, BEDMINSTER, NEW JERSEY
”This is a bit of a surprise but it was not entirely out of the question that they would cut rates. Some people thought Draghi would not want to appear too dovish at his first meeting. But certainly the economic fundamentals justify it. Europe appears to be on the verge of recession.
“Coupled with the chance we won’t have a Greek referendum, I think this will be encouraging for risk appetite. It shows the ECB is being flexible, not sticking blinding to an inflation mandate at a time like this. And if Greece doesn’t have a referendum, it opens the door to their getting the aid package. If the euro can get above $1.3860 or so, that could open the way for more gains.”
NATALIA AGUIRRE, RESEARCH DIRECTOR, RENTA 4 BROKERAGE, MADRID
”There’s no doubt it’s good for all of the heavily indebted economies such as Spain. Now we just need it to be transferred to the Euribor review.
“The markets right now needed help from every side.”
PIERRE ELLIS, SENIOR GLOBAL ECONOMIST, DECISION ECONOMICS, NEW YORK
“This is a response to the weakening European economy. There is not a situation to further roil the market given the situation in Greece. They are in a situation that makes conforming to a pure inflation target a charade.”
”Although the cut is fully justified by the current mkt and economic conditions, the move is a real surprise, given that the September press conference didn’t prepare the ground for an imminent rate cut.
”The recent development in Greece, uncertainties about the EU package implementation and risks of spill-over effects to other EMU countries (i.e. Italy) have probably convinced the new ECB president Draghi (and the rest of the GC) that it was now time for the ECB to come in and try to rescue the EMU economy.
”We expected stable rates today and a 50bp cut in December. The rates corridor has not been changed today. However, we expect Draghi to signal today that the ECB will continue to buy bonds via the SMP in the coming weeks.
“Given the ongoing developments for EMU periphery spreads, Draghi might even suggest that ECB will be even more aggressive with its SMP bond purchases but we strongly believe that Draghi will make crystal clear that the move is just temporary and strictly conditional to a rapid implementation of the EFSF changes.”
- The majority of 70 economists polled by Reuters a week ago had expected the ECB to hold its key interest rate at 1.5 percent at Thursday’s meeting while preparing the ground for a 25-basis points cut in December.
- The cut marks a change in policy course after the ECB increased its rates in July and April, when it became the first major central bank to hike after the intensification of the financial crisis.
- Markets will now look for hints on whether the ECB is preparing to cut rates again next month.
- Attention will also focus on other changes in the central bank’s policy after the change of guard, especially whether its government bond program will be boosted.
Reporting by Reuters bureaus