The European Central Bank (ECB) cut its Main refinancing operations rate by 25 basis points to 1.25% from 1.50%. The Bank said "Owing to their unfavourable effects on financing conditions and confidence, the ongoing tensions in financial markets are likely to dampen the pace of economic growth in the euro area in the second half of this year and beyond. The economic outlook continues to be subject to particularly high uncertainty and intensified downside risks. Some of these risks have been materialising, which makes a significant downward revision to forecasts and projections for average real GDP growth in 2012 very likely. In such an environment, price, cost and wage pressures in the euro area should also moderate; today's decision takes this into account."
The ECB also announced the details of its new covered bond purchase programme (CBPP2). The program will purchase a nominal EUR 40 billion amount of Euro denominated securities in primary and secondary markets, with an issue volume greater than EUR 300m, minimum credit rating of BBB-, maximum residual maturity of 10.5 years. The purchases will begin in November and be completed by October 2012 at the latest.
The meeting is the first under new ECB president, Mario Draghi. The ECB last increased the interest rates by 25 basis points at its July meeting; pausing in May and June, after raising the rate by 25 basis points to 1.25% in April this year. The Euro Area reported annual HICP inflation of 3% in October and September, 2.5% in August and July, 2.7% in June (same as May) and above the Bank's inflation target of maintaining inflation below, but close to, 2% over the medium term.
The Euro Area reported quarterly GDP growth in the June quarter of 0.2%, following a 0.8% increase in the March quarter, and a 0.3% increase in the December quarter of 2010. The Euro (EUR) has gained about 3% against the US dollar so far this year, while the EURUSD exchange rate last traded around 1.375