The European Central Bank (ECB) cut rates on Thursday to a record low and said it would follow the Bank of England in launching a process of “quantitative easing” in a desperate bid to pull the eurozone’s stricken economy out of recession.
The bank shaved a quarter point (25 basis points) off its main interest rate, taking it to 1 percent. This is the seventh time it has reduced rates since October, when they stood at 4.25 percent.
It also announced that it would pump 60 billion euros (US$80.4 billion) into the 16-nation economy through buying “covered” bonds. These are primarily corporate bonds, but holders have access to assets that secure or “cover” the bond if the company that issues them becomes insolvent.
ECB policymakers have spent months arguing about whether to follow Britain and the US in battling the global downturn through purchasing assets. The Bank of England, though, has concentrated on buying government, rather than corporate, bonds. The Frankfurt-based ECB also said it would extend the period under which it lends banks unlimited funds from six months to a year.
Howard Archer, chief European and UK economist at IHS Global Insight, said: “The fact that the ECB felt compelled to take this wide-ranging action highlights the fact that the eurozone economy remains in serious trouble, despite some recent signs that the rate of economic decline is moderating.
“We suspect that the actual recovery still remains some way away and relapses are a very serious risk. Consequently, we expect the ECB to keep interest rates down at 1 percent until well into 2010.”