ECB cut interest rates by 0.25% to 1.00%
7th May 2009
As expected, the European Central Bank elected to cut Eurozone interest rates by 25 basis points to 1.00% today, in its latest effort to steer the Eurozone economy out of recession. However, it is unclear how far the ECB, which has signalled that 1.00% is as low as it is prepared to cut rates, will go in augmenting its rate cut with other measures to get more cash circulating in the economy through so-called "non-standard" measures.
Trichet has refused to be drawn on the nature of these additional ‘non-standard’ measures that the ECB is considering, but his 17th April point that “I think it is important not to create or encourage expectations”, combined with his wish for active participation of banks’ suggests that the ECB will refrain from the Fed and BoE approach of outright purchases of government securities.
Other comments and references since the April meeting also support the view that expanding credit through injections into the banking sector where banks are the primary source of financing is likely to have a greater impact that Central Bank purchases of private or government bonds. Nevertheless, even though Eurozone companies rely relatively less on commercial paper and households rely less on mortgages and consumer credit, it may be that the ECB does go someway own the route of buying market paper.
Attention now shifts to the ECB’s accompanying press conference at 1.30pm (GMT) for further clarification on what unconventional tactics the Central Bank will use.