Thursday, December 8, 2011

ECB Cuts Rate 25bps to 1.00% on Euro Crisis

The European Central Bank (ECB) cut its Main refinancing operations rate by 25 basis points to 1.00% from 1.25%.  ECB governor, Mario Draghi, said: "The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks. In such an environment, cost, wage and price pressures in the euro area should remain modest over the policy-relevant horizon. At the same time, the underlying pace of monetary expansion remains moderate."

The ECB also announced a series of measures "to support bank lending and money market activity". These measures included longer-term refinancing operations (LTROs), reduction in the reserve ratio to 1% from 2% presently, and increasing collateral availability through reducing the rating threshold for asset-backed securities (ABS), and allowing national central banks to accept bank loans as collateral. Essentially the moves are designed to prevent a freezing up of credit markets and liquidity akin to that seen during the global financial crisis. 

Previously the ECB also cut the interest rate by 25 basis points at its November meeting.  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 November and 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. 

Euro Area reported quarterly GDP growth in the September quarter of 0.2% (1.4% y/y); the same as 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) us basically flat against the US dollar so far this year, while the EURUSD exchange rate last traded around 1.34


  1. Is that all???

    Well, the euro crisis summit better be good!

  2. More details to come at the press conference - will update as we hear more. They could yet announce something at the conference...

  3. it is amazing to watch the ECB twiddling their thumbs while the Euro and Eurozone flames out.

  4. Well it aint over yet... to be fair, the ECB will have a much easier time doing SMP-max or a decent QE program unless things do deteriorate a bit more.

    On the plus side, if they knew the euro leaders summit would be an absolute flop then they probably would have gone nuclear... we shall soon see

  5. hmm, some of the noises coming out of Europe are sounding positive; fiscal compact, $500b ESM... what I really want to see is a robust long-term solution that actually strengthens the Euro...

  6. Just added an extra paragraph summarising the additional lending and money market activity support measures that the ECB announced.

    In basic terms the measures will help prevent a freezing up of credit markets and liquidity. This is a positive step.