Eurozone interest rates at new low to aid flagging economy

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Eurozone interest rates at new low to aid flagging economy

Eurozone interest rates at new low to aid flagging economy
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The European Central Bank has cut borrowing costs to a new record low trying to breathe life into a weakening eurozone economy.

The benchmark interest rate was reduced from 1.0 percent to 0.75 percent.

But ECB President Mario Draghi and his policymakers resisted pressure from the financial markets and even the International Monetary Fund to take bolder measures.

IMF Managing Director Christine Lagarde urged the bank to resume its purchases of government bonds of distressed eurozone countries, which is an unlikely scenario.

A core of ECB policymakers feel the bank’s bond buying programme – which has been dormant for four months – amounts to monetary financing of governments, which is beyond the ECB mandate.

In his news conference Draghi said the euro zone economy remains’‘ weak’‘ and the recovery will be “gradual” but inflation pressure has lowered further.

At the same time, Britain’s central bank left its main interest rate unchanged at 0.5 percent but will pump the equivalent of another 63 billion euros of new money into the recession-hit UK economy.

Other big economies already have rock bottom rates.

The ECB also reduced its overnight deposit rate to zero, from 0.25 percent, hoping to encourage banks to lend to each other rather than simply parking their cash at the ECB.

The main rate cut was intended as a complement to measures agreed by government leaders last week to tackle the bloc’s debt crisis.

“It’s not so much about the real effect that (a rate cut)
will have,” said Nordea analyst Aurelija Augulyte. “It’s more a psychological game, a game of trying to be supportive of sentiment.”

While inflation remains above the ECB’s target of just below 2.0 percent, it has been sliding recently and ECB staff expect it to average 1.6 percent next year, giving room for a rate cut.

Business surveys released on Wednesday had strengthened the case for a cut, showing the eurozone’s private sector downturn eased only slightly in June and that it remains in recessionary territory.