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ECB cuts rates to record low

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(Globalpost/GlobalPost)

The European Central Bank cut interest rates to a new record low on Thursday amid a chorus of calls for the eurozone to focus on growth to end a "nightmare of unemployment" in the bloc.

A day after May Day demonstrations across Europe for an end to punishing austerity in favour of policies to spur growth, the ECB shaved a quarter point off its key "refi" refinancing rate to a new record low of 0.50 percent.

The widely expected move was by no means unanimous on the ECB's policy-setting governing council, central bank chief Mario Draghi revealed.

But despite the divisions, Draghi vowed to keep rates low for as long as needed and could take further action again if necessary.

The ECB meeting came as a debate resurfaces over whether German-led austerity policies are the best medicine for the recession-wracked eurozone, now in the third year of its crippling debt crisis.

New Italian Prime Minister Enrico Letta, who has vowed to spearhead the drive towards more growth-friendly policies, said on Thursday that a plan was needed within weeks to end the "nightmare" of mounting youth unemployment.

Speaking in Brussels after meeting European Commission President Jose Manuel Barroso, Letta said: "Youth unemployment, that is the real nightmare of my country and the EU."

But the head of the International Monetary Fund, Christine Lagarde, weighed into the debate saying she saw no alternative to austerity championed by German Chancellor Angela Merkel.

"What is the alternative?" asked Lagarde.

Providing hope that the ECB might act again to stimulate the economy, Draghi repeated his comments from last month saying the ECB would "monitor very closely" incoming data and insisting the bank was "ready to act if needed."

But analysts and ECB watchers warned the rate cut might not have a huge economic impact.

"Rates were very low before the ECB acted today anyway," said Berenberg Bank chief economist Holger Schmieding.

Instead, the credit crunch for small and medium-sized enterprises (SMEs) in many struggling countries on the eurozone's periphery "is the key monetary problem holding back major parts" of the economy, Schmieding said.

And it was not immediately clear how the ECB planned to address that problem.

Draghi merely revealed that the ECB was in "consultations" with other European institutions such as the European Investment Bank (EIB) and the Commission.

The ECB's thinking on the issue was "very much at an early stage," he acknowledged.

While financial market tensions have eased in recent months and the region's banks are enjoying easier access to funding, available data suggest banks are still not readily lending to companies.

Another way for the ECB to help alleviate this situation was for it to keep banks flush with as much liquidity as needed, extending its generous "full allotment" mode of financing banks until at least July 2014.

ING DiBa economist Carsten Brzeski welcomed this.

"Although the ECB always love to state that they never pre-commit, this announcement is the boldest signal of long-term commitment to accommodative policies for a long while," he said.

In the past, unlimited liquidity had been promised for around six months. Now it is for another 14 months, the expert noted.

Looking ahead, analysts said they did not expect the ECB to focus on further cuts in interest rates, but on finding a solution to the problem of lending to companies.

"With any further cuts in interest rates likely to have only limited growth support, we suspect that the ECB will be more focused on trying to get more credit flowing to small and medium-sized companies," said IHS Global Insight analyst Howard Archer.

In contrast, ABN Amro economist Nick Kounis felt that the ECB had "left the door for additional monetary easing wide open."

"Overall, the ECB's commentary suggests that it has a clear easing bias and, given the risk that inflation gets stuck at uncomfortably low levels, we think that the chances of further monetary easing over the next few months are significant," Kounis said.

Others were concerned the ECB's generosity might relieve the pressure on governments with a hefty reform agenda ahead of them.

Commerzbank chief economist Joerg Kraemer suggested that while the ECB's actions were "well-meaning, it takes the pressure off the governments in the periphery countries to reform and makes a solution to the debt crisis more difficult."

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http://www.globalpost.com/dispatch/news/afp/130502/ecb-cuts-rates-record-low-0