The European Central Bank has unexpectedly cut interest rates in President Mario Draghi’s first meeting in charge.
With bond yields in Italy and Spain soaring at the prospect of a Greek exit from the eurozone the bank lopped a quarter percent off rates to one and a quarter percent.
The euro fell nearly a cent against the dollar on the news.
“The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks. Some of these risks have been materialising which makes a significant downward revision to forecasts and projections for average real GDP growth in 2012 very likely,” said Draghi.
At 4.5% by the last quarter of 2008 the ECB then drove rates down to just one percent by 2009, only raising rates again last April. Now Draghi’s backtracked. As he said on Thursday, inflation risks look low for the foreseeable future and money supply growth is moderate, so a little extra liquidity will not go astray.
Draghi also reversed a decision by his predecessor to stop issuing ECB bonds, which will now continue. The ECB already has some exposure to Greek debt, holding over 50 billion euros of it.