ECB's Draghi 'ready to act if needed'

ECB president Mario Draghi: "The cut in interest rates should contribute to support prospects for a recovery later in the year"

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The European Central Bank (ECB) said it was "ready to act if needed", should more be required to boost the eurozone's economic health.

The bank also lowered its benchmark interest rate to 0.50% from 0.75%, the first cut in 10 months.

Worries about eurozone persist, with data showing manufacturing activity across the 17-nation bloc shrank in April.

The ECB also extended its cheap loans to banks until at least July 2014.

Austerity debate

Official data released on Tuesday showed record high unemployment in the eurozone, and inflation at a three-year low.

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Puzzle all you like about what the ECB might be about to do next. We shouldn't forget to be surprised that it has taken so long to do even this”

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Well ahead of the ECB's announcement, many economists were forecasting that lower interest rates were likely, but said the fresh data released this week made the case for a cut even stronger.

ECB president Mario Draghi told a news conference that "weak economic sentiment has extended into the spring of this year".

"Inflation expectations in the euro area continue to be firmly anchored," he said.

"The cut in interest rates should contribute to support a recovery later in the year."

There are concerns that the ECB's low interest rates are not feeding through to those economies most in need of a boost, with potential lenders still worried about the economic health of countries such as Greece and Spain.

"Monetary policy stance will remain 'accommodative' for as long as needed," Mr Draghi said.

"We will monitor very closely all incoming information, and assess any impact on the outlook for price stability."

Mr Draghi said that the ECB was prepared to cut interest rates further should conditions make it necessary. He also said the central bank was "technically ready" for negative deposit rates.

Analysis

The key issue is whether the ECB's new lower rate translates through to lower borrowing costs for businesses.

The evidence from economies such as Spain and Ireland, with damaged banking sectors, is that credit remains hard to come by.

Such harsh realities soon took hold of the markets, as ECB President Draghi seemed open to negative deposit rates, so later in the afternoon the euro fell sharply after all.

The euro fell sharply on the comments, losing 0.6% against the pound to 84.135p, edging it towards the recent low of 83.98p that it reached on 26 April. Against the dollar, the euro fell below $1.31.

In recent months there have been growing calls for European countries to move away from austerity measures, which critics say are stifling growth. Instead there are calls for a greater focus on stimulus measures.

Both French President Francois Hollande and newly-elected Italian Prime Minister Enrico Letta have urged a reconsideration of austerity policies.

On Thursday, European Council President Herman Van Rompuy said governments must take immediate action to promote growth and the creation of jobs because patience with austerity measures is wearing thin in some countries.

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Suddenly - or so it seems - everyone's priority is growth and employment. The austerity fetishists have left the stage - almost.”

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"Taking these measures is more urgent than anything," he told a conference in Portugal. "After three years of firefights, patience with austerity is wearing understandably thin."

A cut in interest rates lowers the costs for troubled banks that have taken emergency loans from the ECB, and could help them repair their finances so they can improve lending. But analysts were divided over whether the cut would have much of an impact.

Howard Archer, analyst at IHS Global Insight, said: "Admittedly, it is unlikely that the trimming of interest rates from 0.75% to 0.5% will have a major growth impact, especially given fragmented credit markets, but any potential help to the eurozone economy in its current state is worthwhile."

But Rick Meckler, president of hedge fund Liberty View Capital Management said the rate cut was "an assertive move by the ECB to jump start recovery in the eurozone".

Shrinking
ECB headquarters in Frankfurt The ECB's key interest rate was already at the historic low of 0.75%

Thursday's Purchasing Managers' Index (PMI) highlighted the problems facing many eurozone countries. The index for Germany's manufacturing sector, which accounts for around a fifth of the economy, fell to 48.1 in April from 49 in March. A reading below 50 indicates contraction.

And in France, Italy and Spain, the eurozone's next three biggest economies, the PMI data also revealed contractions in manufacturing activity.

For the 17-nation eurozone bloc as a whole, the PMI index fell to 46.7 last month, from March's 46.8.

"There is nothing here to suggest that manufacturing will turn the corner and stabilise any time soon, putting greater onus on policymakers to act quickly to reinvigorate growth," said Chris Williamson, chief economist at Markit, which collates the PMI figures.

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