Tags: ECB | Key | Rate | Draghi

ECB Cuts Key Rate at First Draghi Meeting

Thursday, 03 Nov 2011 08:50 AM

The European Central Bank has cut interest rates by a quarter percentage point under new head Mario Draghi as it tries to boost an economy that's reeling from a government debt crisis, particularly in Greece.

The move, which comes earlier than expected by many economists, takes the bank's benchmark rate to 1.25 percent.

European growth is expected to slow to near, or below zero, in the last three months of the year.

Uncertainty from Europe's debt crisis is a factor. Business and consumers are reluctant to spend and investors are worried of the potential for more financial turmoil if Greece defaults on its debts.

The hope in the markets is that the rate cut will shore up confidence at a time when Europe is embroiled in a crisis stemming from Greek Prime Minister George Papandreou's pledge to hold a referendum on the country's latest bailout package. That triggered fears of a disorderly Greek debt default and its possible exit from the euro. However, it looks like the referendum could be canned later as Papandreou fights for his political survival.

Now markets are waiting for Draghi's first news conference to see if he indicates the bank is willing to intervene more forcefully in bond markets to keep Greece's troubles from spreading to Spain and Italy.

The bank's key rate had stood at 1.5 percent after increases in April and July aimed at warding off inflation.

Since then the economic outlook has worsened significantly for the 17 countries that use the euro, leading many analysts to think the bank was leaning toward a rate cut. But many thought it would not come until December or earlier next year.

Inflation at an annual rate of 3.0 percent -- well above the bank's goal of just under 2 percent -- gave ammunition to those arguing for a delay. Rate cuts spur growth but can worsen inflation, and fighting inflation is the bank's chief mission.

But leading indicators on business confidence have been sending ominous signs about growth, and Draghi's predecessor Jean-Claude Trichet last month stressed the high level of uncertainty facing Europe's economy.

Trichet's failure to provide a steer about when rates might move was interpreted as an attempt to give his successor a free hand.

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