Ecb lowers key interest rate to record low in fight against crisis

ECB lowers key interest rate to record low in fight against crisis

"We are ready to act if necessary," ecb president mario draghi reiterated on thursday after the foreign affairs meeting of the central bank’s governing council in bratislava, slovakia.

This makes central bank money in the euro area cheaper for banks than at any time since the introduction of the common currency in 1999. In addition, banks can borrow unlimited amounts of fresh money from the ecb until at least the beginning of july 2014. The interest rate for money that banks park overnight at the ecb remains unchanged at zero percent.

Monetary watchdogs hope that the financial industry will pass on the cheap money in the form of loans to businesses and consumers. So far, this has not worked to the extent expected – even though interest rates in the euro area have been extremely low since july 2012 and the ecb has also been helping banks with long-term loans at extremely favorable conditions. The other side of the coin for consumers: low central bank interest rates are also associated with very low interest rates for savings accounts, for example.

The renewed interest rate cut is controversial, even though inflation is currently low – in april, the rate in the euro zone fell to 1.2 percent – and thus leaves the ecb room to maneuver from the inflation side. Because there are doubts, especially in germany, that even cheaper money can really boost the economies of crisis countries such as italy, spain, portugal and greece.

"The downward interest rate move is a tribute by the ecb to the recession in large parts of the eurozone. However, it is very questionable whether it will help," explained martin wansleben, chief executive of the association of german chambers of industry and commerce (dihk). Banks would already have sufficient liquidity leeway for corporate financing, but are not using it.

In contrast, the chief economist of the development bank k, jorg zeuner, welcomed the interest rate cut: "it is a positive signal and should lift sentiment. Ecb thinks european: unemployment is rising in 13 out of 17 countries, and austerity policies are draining demand from the economy in 12 out of 17 countries this year."

Draghi argued: "we have 17 countries whose economies differ greatly. We think: considering that the economic downturn also affects the core countries, everyone benefits from this step."The eu commission expects economic output in the euro zone to shrink further overall in 2013.

This was the italian’s reaction to recent comments by german chancellor angela merkel (cdu) on interest rate policy. Merkel had said a week ago that she saw the ecb in a dilemma: "it would probably have to raise interest rates somewhat for germany at the moment. But it must actually do more for other countries to ensure that liquidity is really made available again and, above all, that this liquidity is used for corporate financing. "Draghi did not regard this as an attack on the central bank’s independence: "i think too much has been read into this statement."

The bundesverband der volks- und raiffeisenbanken (bvr) sees the cause of higher lending rates in southern countries in higher risks and not in the lending rate. Savings bank president georg fahrenschon had already warned before the interest rate cut that banks could use the cheap money to buy higher-yielding government bonds from crisis states: "the policy of cheap money does not solve the problems, but creates new ones. If you’re going in the wrong direction, there’s no point in speeding up."

As the interest rate cut was expected by many analysts, it has hardly moved the stock markets or the euro. The exchange rate of the euro rose slightly and briefly climbed above the 1.32 u.S. Dollar mark.