ECB cuts interest rates to record low

The European Central Bank (ECB) cut interest rates by a quarter of a point on Thursday to counter the twin threats of recession and deflation in the euro zone, and is expected to unveil fresh measures to help banks hurt by the bloc’s debt crisis.

The widely expected rate cut, back to a record low of one per cent, came hours before a high-stakes EU summit which will aim to agree on a plan to defuse the crisis, with France and Germany pushing for rule changes to stricter budget discipline in the bloc.

The ECB, which euro zone officials say has been closely involved in drafting plans for tighter fiscal integration in the bloc, has pressed governments to toughen their budget rules and signalled it could do more to tackle the crisis if they deliver.

ECB President Mario Draghi hinted last week the bank could take stronger action — maybe by buying euro zone government bonds more aggressively — if European leaders agree on tighter budget controls.

The rate cut was aimed at buoying the euro zone economy, which economists expect to slide into recession by early 2012. The euro edged higher after the decision and the benchmark index of European stocks pared gains.

A Reuters survey of 73 analysts had showed a 60 per cent chance the ECB would cut rates by 25 basis points for the second month running, back to the record low of 1.0 per cent it reached during the financial crisis in 2009.

“No surprise. This was the easy bit,” Berenberg bank economist Holger Schmieding said of the rate cut. “Standard monetary policy, including all the things they may announce to support banks, is of secondary importance,” he added. “The only thing that really matters is whether or not they step up their efforts to contain the sovereign crisis.”

Attention now shifts to Draghi’s afternoon news conference, at which he will present revised in-house economic forecasts that are expected to show the euro zone is teetering on the brink of recession.

The Italian, who took the ECB helm last month, is also expected to present new measures to aid banks hit by the crisis.

Sources have told Reuters the ECB is likely to start offering banks funding for two or even three years for the first time ever, to try to prevent the euro zone crisis precipitating a credit crunch that chokes the bloc’s economy.