Instant View - ECB cuts rates by 25 bps, deposit rate at zero

LONDON Thu Jul 5, 2012 8:33am EDT

LONDON (Reuters) - The European Central Bank cut its main interest rate to a record low of 0.75 percent and its deposit rate to zero on Thursday to help tackle the euro zone crisis that threatens to push the bloc's deteriorating economy back into recession.

The ECB cut the interest rate on its deposit facility to 0.0 percent, effectively encouraging banks to lend their funds in the market to other banks overnight, where they receive a higher interest rate, currently about 0.3 percent.

ANALYSTS' COMMENTS:

JENS SONDERGAARD, ECONOMIST, NOMURA

"This outcome is probably the one that is most acceptable to the ECB at this stage.

"I think the big question is 'is that a unanimous rate decision, or are there dissenting members that would have preferred no change?'"

JENNIFER McKEOWN, SENIOR EUROPEAN ECONOMIST, CAPITAL ECONOMICS

"Today's ECB interest rate cut does little to alter the bleak economic outlook and the bank is unlikely to announce any bolder unconventional measures for now.

"The widely anticipated cut from 1.0 percent to 0.75 percent leaves interest rates at a record low and the deposit rate, which acts as a floor for money market rates, at zero. But with effective overnight interest rates already at just 0.3 percent, the effect of the cut on the wider economy is likely to be limited.

"Indeed, some fear that, by reducing banks' profitability, the cut could discourage some types of lending. At least today's action is a sign of support from the ECB, confirming that it has taken the recent downturn in indicators of economic activity seriously.

"But President Draghi is unlikely to announce any further unconventional policies at today's press conference."

MARTIN VAN VLIET, ECONOMIST, ING

"This is welcome news for the (peripheral) banks in the euro area that rely heavily on ECB funding...

"In terms of the Q&A, Draghi will likely be quizzed on the ECB's bond buying programme - it is in 'deep sleep' but does this mean it will never wake up?"

"Moreover, given concerns about the limited firepower of the ESM (bailout fund) in relation to the over 2.5 trillion euros in outstanding Spanish and Italian bonds, he will likely be asked whether the ECB is considering giving the ESM a banking license."

KEN WATTRET, BNP PARIBAS

On zero deposit rate: "It seems that the ECB's historic reservations over the impact of zero interest rates, on the functioning of the money market, for example, have been overcome...

"Our assumption has been for a further 25 basis point cut in the refi rate by September latest. This would require either a compression of the 'corridor' or a negative DFR (deposit facility rate).

"Any additional unconventional policy measures would also be revealed at the press conference.

"We continue to believe that the ECB is reluctant to restart its sovereign debt purchases via the SMP.

"Another extra long-maturity LTRO is a more palatable option. However, how much appetite there is even for that is unclear, as the high use of the deposit facility suggests that there is no aggregate shortage of liquidity in the euro zone."

(Editing by John Stonestreet)

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