The ECB on Thursday announced it was cutting its main policy rate by half a percentage point to 3.25 per cent - the lowest level since October 2006. Despite some speculation that a deeper cut might be announced, the bank appeared to have decided that a larger cut might have appeared a panic reaction
The cut came less than a month after the ECB lowered its policy rate by half a percentage point to 3.75 per cent as part of a coordinated global move by central banks on October 8.
The ECB has seen the eurozone economic outlook change dramatically since the collapse of Lehman Brothers investment bank in the middle of September. Gross domestic product is spiralling downwards, and economists believe the recessionary conditions will last well into next year. Germany on Thursday reported a massive 8 per cent drop in industrial orders in September alone, led by a drop in export orders - the largest monthly fall since reunification.
Eurozone inflation, meanwhile, is falling sharply on the back of lower oil prices. Economists see the annual rate dropping from the current 3.2 per cent to 1 per cent by the middle of next year – significantly undershooting the ECB’s target of an annual rate below but close” to 2 per cent. Jürgen Stark, an ECB executive board member, has acknowledged that annual inflation rates could even turn negative if oil prices continue to plummet.
As a result, the ECB has switched tactics away from combating inflation to focus on stabilising the economy.
Financial markets believe Thursday’s ECB interest rate cut will be followed by further falls in December and early next year, possibly taking the main policy rate as low as the 2 per cent seen in 2003. Jean-Claude Trichet, ECB president, gives a press conference on Thursday afternoon where he will expand on the reasons behind the latest cut.