ECB cuts key interest rate on eurozone deflation, economic malaise

05 June 2014 12:48 Source:ICIS News

LONDON (ICIS)--The European Central Bank on Thursday pared back its key interest rate from 0.25% to 0.15% as foundering rates of inflation and slowing rates of economic growth in the eurozone heighten concerns about the viability of the region’s recovery.

The decision to cut interest rates from their current historic lows came following growing pressure for the ECB to take further steps to stabilise the eurozone in light of lacklustre inflation and GDP data.

Statistics agency Eurostat this week announced that the eurozone’s inflation slipped further from the ECB’s target of 2% last month, falling to 0.5% in May from 0.7% in April.

The agency also confirmed this week that the region’s GDP grew by 0.2% in the first quarter of 2014, with growth rates for six eurozone nations skidding into negative territory. The Netherlands suffered the largest contraction, falling by 1.4% compared to the previous quarter.

Last month, the Organisation for Economic Cooperation and Development’s chief economist called on the ECB to take further steps to increase inflation in the region, and to be prepared to consider further unconventional stimulus measures to arrest the slowdown of the eurozone recovery.

ECB president Mario Draghi has in the past pronounced himself willing to do “whatever it takes” to safeguard the eurozone, and has claimed that the bank has justification to look beyond conventional monetary policy to accomplish that.

A programme to buy up debt from embattled eurozone economies on the proviso of governments agreeing to comply with reform obligations was introduced in 2012, in response to rising investor fears that rising borrowing costs for Italian and Spanish bonds was approaching a crisis point.

The bond-buying programme represented the most interventionist measure adopted by the ECB since the onset of the financial crisis, but was never utilised, as the indication that the bank was willing to backstop struggling eurozone economies no matter what the cost was sufficient to calm market panic and reduce borrowing costs for Italy and Spain.

By Tom Brown