European Central Bank slashes key rate

Bloomberg

The cut, the fourth in as many months, was in line with the median forecast of 60 economists in a Bloomberg survey. The rate was last at this level between 2003 and 2005. The Frankfurt-based central bank took charge of monetary policy in 1999.

President Jean-Claude Trichet said last month there’s a limit to how far the ECB can cut rates and refused to give any signal for January, suggesting he favored a pause. At the same time, the economy of the 16 euro nations is deteriorating more rapidly than the ECB anticipated as the global financial crisis hurts exports, damps spending and threatens credit ratings in the region.

"The consensus to pause collapsed under the bombardment of bad data," said Joerg Kraemer, chief economist at Commerzbank in Frankfurt. "The ECB is hesitant to cut interest rates below 2 percent, but they’ll be forced to."

The ECB still has the highest rates among the Group of Seven industrialized nations. The U.S. Federal Reserve, the Bank of England and the Swiss central bank have cut borrowing costs more aggressively as the world’s largest economies slide simultaneously into recession for the first time since World War II.

The Bank of England on Jan. 8 reduced its main lending rate to 1.5 percent, the lowest since it was founded in 1694. The Fed last month lowered its key rate to a target range of zero to 0.25 percent. Japanese and Swiss rates are also close to zero.

The ECB has reduced its benchmark by 225 basis points since early October. Last month it lowered the rate by 75 points, its biggest step ever.

Avoiding the trap
Trichet said on Dec. 15 the bank was focused on making sure its easing flowed through to the economy. It wanted to avoid being "trapped" with rates that are "too low," he said. Executive Board member Juergen Stark said on Dec. 10 the scope for further moves was "very limited."

The faltering economy is hurting budgets in some euro-region countries. Standard & Poor’s on Wednesday lowered Greece’s sovereign credit rating one notch to A minus.