The European Central Bank cut its benchmark interest rates by 0.25 percentage point, bringing the refinancing rate to a record low of 0.75% and the overnight deposit rate to zero.
The bank's president, Mario Draghi, conceded Thursday that the euro zone's debt crisis had led to a generalized economic slowdown, hitting even the strongest countries in the region.
The governing council's decision was unanimous, indicating that even hawks such as German central bank chief Jens Weidmann had voted for the easing.
Mr. Draghi, while welcoming the outcome of last week's landmark euro-zone summit, forecast profound consequences for the cherished independence of his institution if euro-zone leaders press ahead with their plans to entrust it with powers to police the region's banking sector.
Mr. Draghi said this would inevitably subject the bank to greater democratic scrutiny. Mr. Draghi said the ECB's fear of a broader slowdown across the euro zone had materialized, justifying its decision to cut its benchmark interest rates to historic lows.
"We can genuinely say that this measure is addressed to the whole of the euro area, and not only to specific countries," Mr. Draghi told a regular news conference after a meeting of the ECB's governing council.
The euro fell by more than a cent against the dollar after the news of the rate cuts, and slid to a one-month low of $1.2364 before recovering slightly later.
The news was, however, unable to stabilize a fresh slide in the Spanish and Italian bond markets: 10-year Spanish government yields were up 0.28 percentage point on the day at 6.63%, while the equivalent Italian yield was up 0.15 percentage point at 5.90%.
Mr. Draghi reiterated that the full effect of the ECB's massive injections of liquidity into the banking system were still to be felt, but warned that the bank could be pushing on a string, in so far as it can't do any more to make people want to borrow and invest.
"Credit is now led predominantly by demand, and if demand is weak, you wouldn't expect strong credit growth," Mr. Draghi said. In the news conference, Mr. Draghi spoke publicly for the first time about the consequences for the ECB of last week's summit, at which leaders decided to create a single supervisory body for euro-zone banks.
Most say that the easiest way to achieve this within the framework of the existing European Union treaty is to make the ECB do that job.
With its exclusive mandate of ensuring price stability, the ECB is subject to only minimal scrutiny from European bodies at present, a situation that will have to change if it now is to assume the power of life and death over individual banks."
New tasks will require higher levels of democratic accountability," Mr. Draghi said. While warning that the European Commission and council have yet to lay out any detailed plans, he set out a list of principles that he said would need to be respected.
"Any new task in the supervisory area should be rigorously separated from monetary policy tasks," Mr. Draghi said. "There should be no contamination between the two areas.
"He acknowledged that the ECB would almost inevitably remain highly dependent on the expertise of supervisors at national levels.
At the same time, Mr. Draghi said the council hadn't even discussed the possibility of new "non-standard" measures, such as more ultra-long refinancing operations or purchases of government bonds.
He said the council wasn't even thinking of further non-standard measures at the time, although he asserted that "there is no feeling that we are running low on policy options—we still have all our artillery to pursue the objective of price stability."
This leaves the ECB's rate lower even than at the time of the collapse of Lehman Brothers Inc. in 2008, although Mr. Draghi insisted that the economic situation is "definitely not" as bad as then.
In a surprise decision earlier, China's central bank also cut its benchmark rates earlier Thursday while the Bank of England—as expected—said it would pump another £50 billion ($78 billion) into the U.K.'s ailing economy, raising the target for its asset-purchase program to £375 billion.
Mr. Draghi said the ECB hadn't coordinated its measures with either central bank "beyond the normal exchange of view on the state of the business cycle, the state of the economy and the state of global demand."
The ECB's rate cuts will reduce funding costs for banks across the euro zone. More than one trillion euros ($1.24 trillion) in loans to the banking sector is tied directly to the refinancing rate.
In addition, the reduction of the deposit rate to zero will encourage banks that are currently hoarding liquidity in the ECB's deposit facility to put it to use elsewhere, whether in bond markets or in the real economy.
Mr. Draghi said, however, that he didn't expect any dramatic shift in banks' behavior as a result of the rate cuts.
Mr. Draghi didn't respond directly when asked whether further steps to loosen policy would be necessary, but did say that it might be necessary to "revisit" the bank's collateral policy, which has been adjusted repeatedly since the crisis started.
In his opening statement, Mr. Draghi had said that price pressures "should remain in line with price stability over the medium term." He stressed that uncertainty over the economic outlook is still extremely high, but repeated the bank's existing forecast of a gradual recovery over the rest of the year.
wsj.com
The bank's president, Mario Draghi, conceded Thursday that the euro zone's debt crisis had led to a generalized economic slowdown, hitting even the strongest countries in the region.
The governing council's decision was unanimous, indicating that even hawks such as German central bank chief Jens Weidmann had voted for the easing.
Mr. Draghi, while welcoming the outcome of last week's landmark euro-zone summit, forecast profound consequences for the cherished independence of his institution if euro-zone leaders press ahead with their plans to entrust it with powers to police the region's banking sector.
Mr. Draghi said this would inevitably subject the bank to greater democratic scrutiny. Mr. Draghi said the ECB's fear of a broader slowdown across the euro zone had materialized, justifying its decision to cut its benchmark interest rates to historic lows.
"We can genuinely say that this measure is addressed to the whole of the euro area, and not only to specific countries," Mr. Draghi told a regular news conference after a meeting of the ECB's governing council.
The euro fell by more than a cent against the dollar after the news of the rate cuts, and slid to a one-month low of $1.2364 before recovering slightly later.
The news was, however, unable to stabilize a fresh slide in the Spanish and Italian bond markets: 10-year Spanish government yields were up 0.28 percentage point on the day at 6.63%, while the equivalent Italian yield was up 0.15 percentage point at 5.90%.
Mr. Draghi reiterated that the full effect of the ECB's massive injections of liquidity into the banking system were still to be felt, but warned that the bank could be pushing on a string, in so far as it can't do any more to make people want to borrow and invest.
"Credit is now led predominantly by demand, and if demand is weak, you wouldn't expect strong credit growth," Mr. Draghi said. In the news conference, Mr. Draghi spoke publicly for the first time about the consequences for the ECB of last week's summit, at which leaders decided to create a single supervisory body for euro-zone banks.
Most say that the easiest way to achieve this within the framework of the existing European Union treaty is to make the ECB do that job.
With its exclusive mandate of ensuring price stability, the ECB is subject to only minimal scrutiny from European bodies at present, a situation that will have to change if it now is to assume the power of life and death over individual banks."
New tasks will require higher levels of democratic accountability," Mr. Draghi said. While warning that the European Commission and council have yet to lay out any detailed plans, he set out a list of principles that he said would need to be respected.
"Any new task in the supervisory area should be rigorously separated from monetary policy tasks," Mr. Draghi said. "There should be no contamination between the two areas.
"He acknowledged that the ECB would almost inevitably remain highly dependent on the expertise of supervisors at national levels.
At the same time, Mr. Draghi said the council hadn't even discussed the possibility of new "non-standard" measures, such as more ultra-long refinancing operations or purchases of government bonds.
He said the council wasn't even thinking of further non-standard measures at the time, although he asserted that "there is no feeling that we are running low on policy options—we still have all our artillery to pursue the objective of price stability."
This leaves the ECB's rate lower even than at the time of the collapse of Lehman Brothers Inc. in 2008, although Mr. Draghi insisted that the economic situation is "definitely not" as bad as then.
In a surprise decision earlier, China's central bank also cut its benchmark rates earlier Thursday while the Bank of England—as expected—said it would pump another £50 billion ($78 billion) into the U.K.'s ailing economy, raising the target for its asset-purchase program to £375 billion.
Mr. Draghi said the ECB hadn't coordinated its measures with either central bank "beyond the normal exchange of view on the state of the business cycle, the state of the economy and the state of global demand."
The ECB's rate cuts will reduce funding costs for banks across the euro zone. More than one trillion euros ($1.24 trillion) in loans to the banking sector is tied directly to the refinancing rate.
In addition, the reduction of the deposit rate to zero will encourage banks that are currently hoarding liquidity in the ECB's deposit facility to put it to use elsewhere, whether in bond markets or in the real economy.
Mr. Draghi said, however, that he didn't expect any dramatic shift in banks' behavior as a result of the rate cuts.
Mr. Draghi didn't respond directly when asked whether further steps to loosen policy would be necessary, but did say that it might be necessary to "revisit" the bank's collateral policy, which has been adjusted repeatedly since the crisis started.
In his opening statement, Mr. Draghi had said that price pressures "should remain in line with price stability over the medium term." He stressed that uncertainty over the economic outlook is still extremely high, but repeated the bank's existing forecast of a gradual recovery over the rest of the year.
wsj.com
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