Zee Media Bureau
Bratislava: On the back of rising unemployment and a drop in inflation, the European Central Bank (ECB) on Thursday cut interest rates by a quarter point to a new record low of 0.50 percent.
The cut by Europe’s central bank is the first in 10 months and was driven by the sinking Eurozone economy besides a falling economy.
ECB President Mario Draghi had hinted earlier in March that the bank was ready to act on the economy. Therefore, there was no surprise in the interest rate cut by the bank.
Economic data over the last month have bolstered the case for action, with unemployment hitting a record high in April, when inflation saw its biggest monthly drop in over four years, to 1.2 percent.
"The ECB is playing it safe, even though they know the effect is likely to be limited," Nordea analyst Anders Svendsen said of the cut.
"The key for the market is the tone. If the ECB comes out with other measures as well to help SME (small- and mid-sized enterprise) lending that will be positive but if they say the cut was all they had, I think there will be disappointment."
The euro rose to USD 1.3191 and German 10-year government bond futures edged higher after the decision.
The sharp drop in inflation, from 1.7 percent in March, pressured the ECB to cut rates to honor its mandate to deliver price stability, which it defines as inflation close to but below 2 percent.
The sudden slump in price pressures has also raised the possibility of the ECB having to look at policy tools beyond interest rates to counter any further slide in inflation.
"Ultimately, we think the ECB will have to purchase private-sector assets in order to fix the transmission mechanism," said Andrew Bosomworth at PIMCO, the world's largest bond fund.
The ECB wants to improve the transmission of its monetary policy so its low rates reach all corners of the euro zone.
The bloc's south is not benefiting to the same extent as 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.
With Agency Inputs
First Published: Thursday, May 02, 2013, 20:16