ECB cuts interest rate to record-low 0.5% in desperate measure to drag Eurozone out of recession

Move comes after inflation drops to 1.2%, well below ECB's target of 2%

Unemployment hit record high in April and there are fears economy will not recover from recession this year

Experts say rates may not be passed on by banks in debt-ridden countries

Ready to act: The European Central Bank, led by President Mario Draghi (above), has cut eurozone interest rates to a record low of 0.5% in a bid to stimulate growth

Interest rates in the eurozone were slashed to a record low yesterday in a desperate effort to drag the region out of recession.
The European Central Bank cut benchmark borrowing costs to 0.5 per cent, having held them at 0.75 per cent since July last year.
It follows weeks of deterioration in the eurozone including a surge in unemployment to an all-time high of more than 19.2million – 12.1 per cent of the workforce – and figures yesterday showed the downturn in manufacturing deepened in April.
Germany’s factory output fell for the first time this year as the rot spread to the region’s biggest economy, but French manufacturers were the worst performing in the single currency bloc, in yet another setback to Socialist President Francois Hollande.
The decline in recent weeks, and the ECB’s latest attempt to reverse it, makes a mockery of claims by senior bureaucrats in Brussels that the  crisis is over.
Jose Manuel Barroso, head of the European Commission, provoked scorn early this year by claiming the euro was out of the danger zone.
The single currency fell in value yesterday as ECB President Mario Draghi warned that ‘weak economic sentiment has extended into the spring of this year’.
He added: ‘The cut in interest rates should contribute to support a recovery later in the year.’
But analysts said the measure will do little to stimulate growth and warned that the eurozone faces at least another year of decline.
David Buik, a senior commentator at stockbroker Panmure Gordon, said the cut was ‘too little too late’. Interest rates in Britain have been at 0.5 per cent since March 2009.
The move comes amid fears the eurozone economy may not recover later in the year from its recession.
In theory, a cut helps companies by lowering borrowing costs for banks that have borrowed from the ECB so they could loan more.

False hope? Economists warn the cut may not have much direct effect since banks are not passing on low rates in indebted countries like Cyprus (above) that need help the most

It also signals the ECB's willingness to support the economy.
Economists, however, warn this cut may not have much direct effect since banks are not passing on low rates in indebted countries like Greece, Spain and Cyprus that need help the most.
The cut was widely expected after Draghi said last month the bank stood ready to act.
Economic data over the last month has bolstered the case for action, with unemployment hitting a record high in April, when inflation saw its biggest monthly drop in over four years, to 1.2 per cent.
'The ECB is playing it safe, even though they know the effect is likely to be limited,' Nordea analyst Anders Svendsen said of the cut.
'The key for the market is the tone. If the ECB comes out with other measures as well to help SME (small and mid-sized enterprise) lending that will be positive but if they say the cut was all they had, I think there will be disappointment.'

 

The euro rose to $1.3191 and German 10-year government bond futures edged higher after the decision.
The sharp drop in inflation, from 1.7 per cent in March, pressured the ECB to cut rates to honour its mandate to deliver price stability, which it defines as inflation close to but below 2 per cent.

The sudden slump in price pressures has also raised the possibility of the ECB having to look at policy tools beyond interest rates to counter any further slide in inflation.
'Ultimately, we think the ECB will have to purchase private-sector assets in order to fix the transmission mechanism,' said Andrew Bosomworth at PIMCO, the world's largest bond fund.
The ECB wants to improve the transmission of its monetary policy so its low rates reach all corners of the eurozone.
The bloc's south is not benefiting to the same extent as the north from the ultra-low rates. If they are lending at all, banks there are charging companies and households more for loans than their peers in the north because of higher funding costs and credit risks.

Resistance: German Chancellor Angela Merkel said last week the ECB would have to raise rates if it were looking at Germany alone

The ECB has repeatedly voiced its concern about the impact this has on lending to small- and medium-sized enterprises (SMEs), which have little alternative to bank funding and are a key engine for growth in the currency bloc.
It has said it is studying options to address the problem, but little is expected to have been decided at Thursday's policy meeting. It is one of two that the ECB holds outside of Frankfurt each year.
'We suspect that the ECB will avoid making any formal statement on a potential SME programme ... as it continues to weigh the pros and cons of such measures,' said Frederik Ducrozet, senior euro zone economist at Credit Agricole CIB.
Some ECB policymakers are reluctant to try to fix too many of the euro zone's problems, eager to push onto governments the issue of dealing with SME lending. Draghi must balance this reluctance with the pressure for action.
In Germany, the ECB has even faced resistance to a rate cut.
German Chancellor Angela Merkel said last week the ECB would have to raise rates if it were looking at Germany alone.
German insurers and the county's dominant savings and cooperative banking sector have also joined up to speak out against looser ECB monetary policy, saying it would have little economic impact and undermined savings needed to protect the country's rapidly ageing population.