The European Central Bank cut interest rates for a second straight month and may delve even deeper into its toolbox today to stimulate bank lending and fight off a recession.
ECB policy makers meeting in Frankfurt lowered the benchmark interest rate by a quarter percentage point to 1% to match a record low, as expected by 55 of 58 economists in a Bloomberg News survey. They may also loosen collateral criteria to give banks greater access to cheap cash and offer longer-term loans, said three euro-area officials with knowledge of the deliberations. ECB President Mario Draghi holds a press conference later Thursday afternoon.
The ECB is focusing on getting banks lending again rather than increasing its government bond purchases to fight the debt crisis. Later today, Europe’s leaders will convene in Brussels for talks to frame the fifth "comprehensive" solution in 19 months to the turmoil, which has left Germany and France facing the threat of losing their AAA rating from Standard & Poor’s.
The ECB’s insistence that governments take measures to restore investor confidence appears to have paid dividends, with Italian and Spanish yields plunging after Germany and France agreed to move the 17-nation euro area toward a fiscal union.
The Bank of England kept the size of its asset-purchase program unchanged at 275 billion pounds ($432 billion U.S.) today and left its key rate at 0.5%.
Investors will look for signs from Draghi that the ECB is willing to step up its bond purchases to cap government borrowing costs if leaders agree on a concrete plan and timeline to stamp out the crisis, according to some observers.
Draghi said on Dec. 1 that the ECB’s bond buying "can only be limited." If governments move toward a “fiscal compact,” there may be room for "other elements," he said, without elaborating.
European Union leaders will meet for dinner this evening in Brussels for talks that will continue tomorrow.
French President Nicolas Sarkozy and German Chancellor Angela Merkel are proposing to amend European treaties to tighten controls on budgets. Still, Germany rejects proposals to combine the region’s current and permanent rescue funds, a German government official told reporters in Berlin yesterday on condition of anonymity.
The ECB must step up its asset purchases, said Angel Gurria, secretary general of the Organization for Economic Cooperation and Development.
“The ECB is the ultimate weapon” and “has to be part of the solution,” he said yesterday in an interview in Durban, South Africa. “You are using a slingshot, where is the bazooka?”
Draghi has indicated the ECB will address signs of a credit squeeze, which falls squarely within its remit.
