The European Central Bank has cut its main interest rate for the first time in 10 months, in an attempt to get the recession-mired eurozone growing again.
ECB president Mario Draghi said that should help the economy recover “later in the year”.
The cut, from 0.75 percent to a record low 0.5 percent, came with a promise to provide as much liquidity – that is money – as eurozone banks need well into next year. There was also a pledge to help smaller companies get access to loans.
Draghi worries that economic weakness is spreading. He told reporters: “This weakness in economic activity, and the revised price stability projections for the medium-term, are also now affecting, not only non-core economies – where one might have had doubts about the transmission of monetary policy mechanisms – but also core economies.”
Bigger cut discussed
The central bank chief 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 cut in the cost of borrowing was widely expected, even before the latest surveys of factory activity showed declines in the eurozone, the United States and China.
Manufacturing output in Germany – Europe’s largest economy and the world’s second-biggest exporter – just fell for the second month running and at a faster pace than in March.
The lack of economic growth means Europeans are spending less, so inflation has fallen sharply – annual inflation plunged to 1.2 percent in April.
That gives the ECB the leeway to cut rates as its primary focus is supposed to be price stability – that is keeping inflation in check.
The southern countries in the eurozone are not benefiting to the same extent as those in the north from the ultra-low rates. If they are lending at all, banks there are charging companies and households more for loans than their peers in the north because of higher funding costs and credit risks.
“There can’t be fears of lack of funding as an excuse for not lending,” Draghi said after the meeting in Bratislava, one of two that the ECB holds outside of Frankfurt each year.
The ECB has repeatedly voiced its concern about the impact this has on lending to small- and medium-sized enterprises (SMEs), which have little alternative to bank funding.