Tags: European | Central | Bank | rates

ECB Expected to Trim Interest Rates, but Do Nothing More

Tuesday, 03 July 2012 12:52 PM

Europe's sinking economy and wobbly banks could get more help Thursday from an interest rate cut by the European Central Bank.

Economists think the ECB will cut its benchmark refinancing rate by at least a quarter point to 0.75 percent, a record low, when its governing council meets in Frankfurt. That would further cheer markets, which have been rallying since European leaders last week announced new measures to fight the continent's debt crisis.

But the ECB is likely to hold off from more aggressive measures, such as new cheap loans to banks. Its president, Mario Draghi, has said there is only so much the central bank can do and that it was up to Europe's politicians to restore confidence in the 17-country eurozone.

The leaders agreed at their summit last week to create a banking union under the ECB's aegis with the power to rescue banks directly. The goal is to spare single governments from being overwhelmed by the costs of rescuing banks. They also made it easier for countries to access bailout funds.

The measures exceeded financial markets' hopes and triggered a rally in stock markets and a drop in borrowing rates for financially troubled Spain and Italy.

But much work remains to fill in the details on those measures.

The ECB's refinancing rate is what banks pay when they borrow from the ECB, no matter for what duration, and therefore influences the cost of loans to the wider economy.

Other central banks are also expected to step in to support economic growth, which has been slowing across the globe. Analysts predict the Bank of England will reopen its program of buying government bonds from banks.

The goal is to increase the amount of money flowing through the economy, improving banks' ability to lend. The Bank of England's policy committee will make a decision on Thursday.

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Tuesday, 03 July 2012 12:52 PM
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