ECB cuts interest rate and unveils liquidity steps

The European Central Bank has cut the Eurozone interest rate to one per cent to return the bloc to the ultra-low rate seen at the start of 2011 and set out two new measures to help improve banks' access to funding.

New ECB president Mario Draghi has within a month of starting at the bank reversed the two rate rises his predecessor, Jean-Claude Trichet, introduced this year.

“It had been expected and was almost the bare minimum the ECB could deliver in the current situation,” said ING economist Carsten Brzeski.

Draghi also said the Bank would extend the maturity on loans to banks to three years, and would make it easier for banks to post collateral against loans by allowing them to use lower-rated assets.

It will now accept A-rated assets, and will temporarily allow national central banks more flexibility on the collateral they accept.

Finally, it has cut the reserve ratio in half from two per cent to one.

"These measures should ensure enhanced access of the banking sector to liquidity and facilitate the functioning of the euro area money market. They are expected to support the provision of credit to households and non-financial corporations," the ECB said in a statement.

The 25 basis-point interest rate cut should ease pressure on companies and banks across the region but economists warned that it could have little effect.

“Today’s interest rate cut may ease the burden of debt repayment slightly if it actually feeds through to borrowers.

"But in the prevailing climate of uncertainty it is unlikely to spur on consumption and investment as consumers fret about unemployment and firms about the economic outlook,” said Tim Ohlenburg, senior economist at the Centre for Economics and Business Research.