Bank Of Italy Cuts Rates To 20-Year Low

The Bank of Italy, encouraged by moderate inflation, said on Tuesday it would cut the officialdiscount rate to 6.75 per cent from 7.50 per cent the lowest for over 20 years.

The move, eagerly awaited by financial markets, came as a relief to Prime Minister Romano Prodis government which wasanxious for a fall in borrowing costs to help lower the interest bill on Italys huge public debt.

The Bank of Italy said it would cut the discount rate on Wednesday and would simultaneously lower the fixed term advances, or Lombard rate, to 8.25 per cent from a previous 9.00 per cent.

 

It was the third rate reduction in six months and the discount rates lowest since September 1975. The last monetary easing came on October 23.

The decision by the Bank of Italy will give a new impulse to development and the economic pick-up as well as employment inthe country, a statement from Prodis office said.

The Bank of Italy said it acted following a steady decline in inflation in recent months. Earlier on Tuesday preliminary data from 11 Italian cities pointed to the inflation rate rising 2.6 per cent year-on-year in January, unchanged from the last two months.

The central bank has said it wants to bring average inflation this year to under 3.0 per cent from 3.9 per cent in 1996.

The bank said in a statement it was closely watching trends in consumer demands, labour costs and price policies.

While the market had expected further rate cuts, the exact timing surprised many analysts who did not think the Bank of Italy would move until after a long-running pay dispute in the large metalworkers and engineering sector was resolved.

I didnt expect the Bank to cut just on January CPI data which were really neutral, said Gianluca Sanna, economist with Banco di Sardegna in Milan.

The Bank is clearly not afraid of possible inflationary pressures from labour costs, he added.