New ECB president cuts rates

Tim Wallace
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MARIO Draghi, the new president of the European Central Bank, cut interest rates at his first meeting in charge yesterday in an effort to head off a “mild recession” in the Eurozone.

The benchmark interest rate was cut from 1.5 per cent to 1.25 per cent in a move that surprised markets, who had expected the ECB to wait until next month before loosening policy.

Inflation in the euro area currently stands at three per cent – well above the ECB’s two per cent target – but Draghi said it would fall below target in 2012.

Analysts are predicting more cuts in the months ahead due to the rapidly worsening economic outlook and European sovereign debt crisis.

“The ECB is likely to take interest rates back to one per cent in the coming months as we are unlikely to see a resolution to the Greek crisis soon,” said Azad Zangana, an economist at Schroders.

The ECB also announced details of its new €40bn (£34.5bn) covered bond purchasing programme, which will be used to buy corporate debt on the primary and secondary market.

Analysts welcomed the move, which seeks to unfreeze illiquid capital markets for companies and banks.

“The €40bn is not large in relation to banks’ funding needs, but it is in the covered bond market,” Barclays Capital’s Julian Callow said.

“In these conditions it should have a positive impact.”