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ECB Cuts Rate, Tempers Hopes for Bigger Bond Buys |
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2011-12-9
European Central Bank President Mario Draghi disappointed financial markets Thursday by keeping them guessing about whether the bank is willing to take aggressive action to bail out heavily indebted euro countries.
But in a sign of rising concern about Europe's debt crisis, the ECB cut its benchmark interest rate by a quarter point to 1 percent and announced several steps to bolster the continent's economy and financial system.
The actions didn't impress markets. Stocks and the euro fell heavily, while borrowing costs for European governments rose.
Based on comments Draghi made in a speech last week, hopes had been rising that the ECB was prepared to ramp up its purchases of European government bonds as the eurozone economy slides toward recession. But on Thursday, he said the bank had no explicit plan to do so and was "surprised" by the way his remarks had been interpreted.
Speaking at a news conference after the rate decision, Draghi said the notion of the eurozone being broken apart by its worsening debt crisis was "far-fetched." He stressed that market confidence in the 17 countries that use the euro would rise if leaders at a European Union summit in Brussels agree to a credible plan to enforce budget discipline.
Such a plan is "the most important precondition for restoring the normal functioning of financial markets," Draghi said.
Draghi, a former head of the Italian central bank, became president Nov. 1 and announced a rate cut at his first policy meeting two days later. In five weeks on the job, Draghi has begun to recast the image of the ECB, which until recently had been deemed too timid to save the euro.
Markets are still trying to figure out how much his policies might depart from his predecessor, Jean-Claude Trichet. Trichet was regarded by some as an overly rigid interpreter of the bank's anti-inflation mandate enshrined in the European Union treaty. He has been criticized by some economists as too slow to cut rates during the Great Recession — and then too quick to raise them afterward, as the bank did twice earlier this year.
Draghi's actions over the past five weeks are seen as a sign of both a more pragmatic approach and of Europe's deteriorating financial condition.
Aside from the rate cut, the ECB announced other measures intended to stimulate lending and investing and bolster Europe's financial system:
— It said banks could tap unlimited credit for up to 36 months and that it would loosen rules on collateral for these loans by accepting lower-rated mortgages and bank loans. Previously, the credit had been available for no more than about a year. Extending the term is meant to reassure markets that banks will have financing for at least three years.
— It also reduced the amounts banks must hold in reserve with the ECB, helping them bolster their finances.
Analysts said the rate cut would help, but they had hoped for more. "I thought they'd be more aggressive and cut by 50 basis points because the economy looks like it's heading for recession and the banking sector is facing big pressures," said Neil MacKinnon, global macro strategist at VTB Capital. In the U.S., by contrast, the Federal Reserve pushed short-term interest rates to zero in December 2008 and kept them there.
Source:Associated Press
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