* ECB cuts main rate by 25 bps as expected
* ECB cuts deposit rate to zero
* Draghi says euro zone to recover only gradually
* No signal more bond-buying or long-term liquidity imminent
By Marc Jones
FRANKFURT, July 5 The European Central Bank cut
interest rates to a record low on Thursday to breathe life into
a deteriorating euro zone economy but steered clear of more
dramatic measures such as buying government bonds or flooding
banks with fresh liquidity.
The ECB policymakers' decision to cut their main refinancing
rate by a quarter point to 0.75 percent was unanimous and
followed a dire batch of economic data that show even euro zone
powerhouse Germany is entering a modest downturn.
European shares extended gains on the decision before
turning negative after ECB President Mario Draghi said the euro
zone would recover only slowly, threatened by the debt woes of
several of the bloc's members and banks' unwillingness to lend.
"The risks surrounding the economic outlook for the euro
area continue to be on the downside," Draghi told a news
conference, saying there was effectively no growth in the euro
"Beyond the short term, we expect the euro area economy to
recover gradually, although with momentum dampened by a number
of factors. In particular, tensions in some euro area sovereign
debt markets and their impact on credit conditions."
The ECB's loosening of policy followed shortly after China
and Britain did similar.
Draghi said there was no coordination between the three.
In addition to cutting the main refinancing rate, the ECB
also reduced its deposit rate, which acts as a floor for the
money market, to zero from 0.25 percent.
This move could encourage banks to lend to each other rather
than simply parking funds of up to 800 billion euros back at the
ECB every night, for which they will now get no return.
It will also be welcomed by the southern European banks that
have tapped the ECB heavily for loans. A 25-basis-point cut
would decrease annual interest payments from the 1 trillion
euros in 3-year loans by about 2.5 billion euros.
The interest rate cut is not seen as a panacea for the euro
zone's problems, which stem from a loss of confidence in state
and bank finances, but the reduction in borrowing costs shows
the ECB is ready to support the flagging economy.
"Today's ECB interest rate cut does little to alter the
bleak economic outlook," said Jennifer McKeown at Capital
Economics. "At least today's action is a sign of support."
Draghi urged businesses to take confidence from the cut.
"It is encouraging, it should make entrepreneurs think their
investment decision trade-offs are now improved, are now
better," he said.
While inflation remains above the ECB's target of just below
2 percent, it has been sliding recently though Draghi said he
saw no signs deflation in any euro zone country.
Of 71 economists polled by Reuters, 48 had expected the bank
to cut, most of them by 25 basis points, though some others
forecast a larger decrease.
Draghi said the decision was unanimous. "This carries a
special strength," he said.
Despite the pressure of the euro zone crisis, Draghi said
the economic and financial situation was not as bad as in 2008,
when the collapse of Lehman Brothers bank sparked the global
"We are not there at all," he said. "The financial
environment (is) nowadays a little less tense than it was a
The central bank had faced pressure from investors and the
International Monetary Fund to take bolder measures, with IMF
Managing Director Christine Lagarde urging the bank to resume
its purchases of government bonds.
The ECB did not heed that advice. A core of its policymakers
feel the bank's bond buying programme - dormant for four months
now - amounts to monetary financing of governments, which is
beyond the bank's mandate.
Draghi also gave no strong signal that the ECB was poised to
offer a repeat of the twin 3-year ultra-cheap loans, or LTROs,
with which it funnelled over 1 trillion euros to banks in
December and February.
"We didn't discuss any other non-standard measures," he
The size of the twin LTROs offered in December and February
meant their effect would take time to show up, said Draghi,
though he did not rule out further such action.
"We always said that our non-standard measures are
temporary, and we don't want to pre-commit about future
decisions," he said. "But certainly now a few months have
passed, and we see that credit flows are actually weak and
While the ECB is not ready to announce that the bond
programme is officially over, it has become clear that the
purchases would be restarted only in an absolute emergency.
By contrast, easing price pressures gave the ECB plenty of
cover to cut rates, backing up an EU summit deal last week when
government leaders agreed to let the euro zone's rescue fund
inject aid directly into banks and intervene on bond markets.
Draghi dismissed another crisis response option: allowing
the ESM rescue fund to have access to the ECB's cheap loans - a
scenario that would boost the ESM's firepower and allow it to
intervene with real impact on bond markets, where Spain's
benchmark yields are still well above 6 percent.
Asked if the ECB could boost the ESM, Draghi replied: "I
don't think there is anything to gain in destroying the
credibility of an institution, asking it to behave outside the
limits of its mandates."
"Frankly, right now I think the ESM and the EFSF with the
new modalities are enough, are adequate to cope with the risks
that ... with the contingencies that we can envisage now."