Thursday, July 5, 2012

ECB cuts key interest rate by 25 bps to 0.75%

    The European Central Bank (ECB) cut its benchmark repurchasing rate (repo rate) by 25 basis points to a record low 0.75 percent to aid a weak economy in the euro area that is keeping inflation in check.
    ECB President Mario Draghi said the economy in the 17-nation euro area continued to remain weak with heightened uncertainty weighing on confidence and sentiment.
    "The risks surrounding the economic outlook for the euro area continue to be on the downside, Draghi told a news conference in Frankfurt.
    "The main downside risks relate to the impact of weaker than expected growth in the euro area. Upside risks pertain to further increases in indirect taxes, owing to the need for fiscal consolidation, and higher than expected energy prices over the medium term," he added.
     Draghi said it was essential for banks in the euro area to strengthen their balance sheets so they can provide loans to businesses and consumers.
     Looking beyond the short-term, he expects the recovery to be weighed down by tensions in government bond markets, high unemployment and the need to pay down debt by both the financial and the non-financial parts of the economy.

    "Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term,"  Draghi said.
     In June consumer prices in the euro area rose 2.4 percent year on year, the same rate as in May.
    In addition to the repo rate, the ECB also cut the rate on the marginal lending facility by 25 points to 1.5 percent and the rate on overnight deposits by 25 points to 0 percent from July 11.



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