The ECB's governing council on Wednesday announced the first cut in borrowing costs since July 2012, reducing interest rates to a record low of 0.5%. The bank's policy meeting in Bratislava came to its decision against a backdrop of weak economic data, including unemployment across the 17 member countries of the single currency hitting a record high of more than 12%.
The euro fell more than 1% against the dollar to $1.304 in the wake of Draghi's comments. The ECB president also suggested that the ECB would consider imposing a negative interest rate on deposits held at the central bank, to prevent banks parking money at the ECB instead of lending it out to companies. The ECB's deposit rate already stands at zero.
Explaining the bank's decision to cut rates in his regular press conference, Draghi pointed out that GDP across the eurozone has now declined for five consecutive quarters, and that "weak economic sentiment has extended into spring of this year".
However, Draghi urged policymakers to keep faith with austerity amid a fierce debate in Europe about whether crisis-hit countries should be allowed to ease up on their drastic deficit-reduction plans.
"In order to bring debt ratios back on a downward path, euro area countries should not unravel their efforts to reduce government budget deficits and continue, where needed, to take legislative action or otherwise promptly implement structural reforms, in such a way as to mutually reinforce fiscal sustainability and economic growth potential," he said.
David Brown of New View Economics said: "The ECB rate cut is no surprise as it was well flagged by Draghi at last month's meeting. Is it enough? No. The marginal effect of the cut is very limited, but at least it should have some symbolic rallying effect on economic confidence".
However, the ECB dashed hopes that it would announce a detailed set of policies to unblock lending to small businesses, which are often unable to access bank lending at affordable rates, particularly in the eurozone's bailed-out peripheral economies.
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German chancellor Angela Merkel, who is running for re-election in September, recently cast doubt on the need for a reduction in rates, saying German savers would benefit from a higher rate instead.
But the ECB has become increasingly concerned about a credit crunch in some of the eurozone's struggling peripheral states, with funding for firms drying up. Draghi said he was "frustrated" that banks were not lending more, adding that the ECB could only use the tools it has available.
"We can't just throw money out of helicopters. We have to go via the banking system," he said, in a reference to the famous comment by the economist Milton Friedman – recently picked up by US Federal Reserve chairman Ben Bernanke – that in if central banks really wanted to deal with deflation they could drop bundles of banknotes out of a helicopter.
Low interest rates are supposed to support manufacturing and other heavy industry. But (i) we don't have very much of that any more in Europe, certainly not enough for it to be the main driver of the economy, and (ii) the ECB rate isn't what a manufacturing company can borrow at anyway.
It's very hard to see what effect the bankers are expecting to get with this move. All it will do is give a few more quid to banks as they can borrow at 0.5% and lend at 6%, instead of borrowing at 0.75% and lending at 6%.
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