European Central Bank Cuts Interest Rates to Zero

By David McHugh, Huffington Post – July 5, 2012

FRANKFURT, Germany — The European Central Bank cut its benchmark interest rate to a record low Thursday to spark economic growth but gave little sign it would take further action soon to ease Europe’s financial crisis.

By cutting its key refinancing rate by a quarter percentage point to 0.75, a move that was widely expected, the ECB sought to give Europe’s sagging economy a lift by making it cheaper for businesses and consumers to borrow.

Financial markets were underwhelmed, though, and even ECB President Mario Draghi conceded during a press conference that the impact of the rate cut could be “muted” given the low demand for credit in the slow economy. Analysts noted that interest rates were already low, that banks remain wary of lending to each other and that businesses and consumers see little reason to take on more debt.

In a more surprising move, the ECB also cut the interest rate it pays banks on overnight deposits by a quarter percentage point – to zero. The move could nudge banks to lend more money, rather than sock it away with the ECB and earn no interest. But even that move could have limited effect, analysts said, since there are other safe havens for banks to park their money.

Draghi said the bank acted in the face of economic pressures being felt by the 17 countries that use the euro, nearly half of which are in recession.

He said there is more the ECB could do to stimulate growth – “we still have all our artillery ready” – and indicated inflation should remain low, which gave the bank room to reduce rates.

But Draghi, who has said Europe’s problems cannot be solved without stronger political and economic ties, offered little hope the bank would take more emergency measures to ease the debt crisis, such as cheap loans for banks. He did, however, indicate the ECB could make it easier for banks to borrow from it by accepting a wider range of collateral.

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