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Rate cut proves ECB is ready to act

Thursday, November 07, 2013 - 01:53

Nov 7 - The European Central Bank has cut interest rates to a new record low to prevent the euro zone's recovery from stalling as inflation tumbles. As Sonia Legg reports, the decision came as a big surprise.

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ECB President Mario Draghi said he'd do whatever it takes - and it seems he has. (SOUNDBITE) (English) PRESIDENT OF THE EUROPEAN CENTRAL BANK, MARIO DRAGHI, SAYING: "We decided to lower the interest rate on the main refinancing operations of the euro system by 25 basis points to 0.25 percent." It was a huge surprise and the euro slid more than 1% to a seven week low. But that was the intention. Its high value has been threatening the euro zone's fragile recovery. Low inflation hasn't helped either. It was 0.7% in October- well below a 2% target. Policy makers have player down fears of Japan-style deflation but they're clearly taking no chances. (SOUNDBITE) (English) PRESIDENT OF THE EUROPEAN CENTRAL BANK, MARIO DRAGHI, SAYING: "The economic analysis indicates that we may experience a prolonged period of low inflation to be followed by a gradual upward movement towards inflation rates below but close to two percent later on. A cross-check with the signals from monetary analysis confirms this picture." Draghi also hopes the cut will help banks enhance their cash reserves and encourage them to lend more. Keeping these early signs of recovery going are key, says Berenberg Bank's Chief Economist Holger Schmieding (SOUNDBITE) (English): HOLGER SCHMIEDING, CHIEF ECONOMIST, BERENBER BANK, SAYING: "What today's action means is that the risk of an excessively expansive euro, of a euro overshoot dampening the recovery too much, that that risk has now receded." Money market traders got it spectacularly wrong - 22 of the 23 polled by Reuters expected a rate hold. But Draghi is on a mission. (SOUNDBITE) (English): HOLGER SCHMIEDING, CHIEF ECONOMIST, BERENBER BANK, SAYING: "I don't think there will be another rate cut. I do think the economy will strengthen on its own without needing a further rate cut. But, of course, if something unexpected were to happen in the euro zone, then the ECB would react pretty much immediately." Draghi has certainly shown he's not afraid to act. He also reaffirmed the bank's forward guidance that rates will remain at current levels or even lower for an extended period.

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Rate cut proves ECB is ready to act

Thursday, November 07, 2013 - 01:53