ECB Cuts Benchmark Interest Rate by 25bps to 0.5%


The European Central Bank cut its main interest rate for the first time in 10 months, driven by an economy mired in recession and falling inflation.

In the May 2nd meeting, which was held in Bratislava, the Governing Council of the ECB took the following monetary policy decisions: The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 0.50%, starting from the operation to be settled on 8 May 2013; the interest rate on the marginal lending facility will be decreased by 50 basis points to 1.00%, with effect from 8 May 2013 and the interest rate on the deposit facility will remain unchanged at 0.00%.

Excerpt from the statement by Mario Draghi, president of the ECB:

The latest decisions are consistent with low underlying price pressure over the medium term. Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. In keeping with this picture, monetary and loan dynamics remain subdued.

At the same time, weak economic sentiment has extended into spring of this year. The cut in interest rates should contribute to support prospects for a recovery later in the year. Against this overall background, our monetary policy stance will remain accommodative for as long as needed. In the period ahead, we will monitor very closely all incoming information on economic and monetary developments and assess any impact on the outlook for price stability.
 
The Governing Council decided to start consultations with other European institutions on initiatives to promote a functioning market for asset-backed securities collateralised by loans to non-financial corporations. In the meantime, it is essential for governments to intensify the implementation of structural reforms at national level, building on progress made in fiscal consolidation and proceeding with bank recapitalisation where needed. Furthermore, they should maintain the momentum towards a genuine Economic and Monetary Union, including the swift implementation of the banking union.
 
In order to ensure adequate transmission of monetary policy to the financing conditions in euro area countries, it is essential that the fragmentation of euro area credit markets continues to decline further and that the resilience of banks is strengthened where needed. Progress has been made since last summer in improving the funding situation of banks, in strengthening the domestic deposit base in stressed countries and in reducing reliance on the Eurosystem as reflected in repayments of the three-year LTROs. Further decisive steps for establishing a banking union will help to accomplish this objective. In particular, the Governing Council emphasises that the future Single Supervisory Mechanism and a Single Resolution Mechanism are crucial elements for moving towards re-integrating the banking system and therefore require swift implementation.

ECB | Nuno Fontes | nuno@tradingeconomics.com
5/2/2013 1:53:23 PM