European Central Bank cuts interest rate to record low

Mario Draghi, President of the European Central Bank (ECB), speaks to the media following a meeting of ECB leadership at the European Central Bank on January 10, 2013 in Frankfurt, Germany.

The European Central Bank (ECB) has cut interest rates for the first time in 10 months. The bank -- which serves the 17 countries that use the euro -- has cut its key rate by 0.25 perecent  to a record low of 0.5 percent.

Calls for a cut had been growing, with the latest manufacturing survey piling on the pressure. The Purchase Managers Index showed further falls in France, Italy, and  Spain. Even Germany -- Europe’s most powerful economy  --  is suffering a decline in its manufacturing activity.

But it’s not entirely clear how much stimulus the ECB can provide. The Bank has much less leverage than the U.S. Federal Reserve. It can’t print money because of German objections, and there are real doubts that today’s interest rate cut will help the euro zone countries that need it most.

“It’s very hard to make an interest rate cut, at the ECB level, effective at the level of, say, Greece, Cyprus or Spain,” says Andrew Hilton, head of the CSFI think tank. “It’s very hard because you have to get the banks in those countries to lend more money at the lower rates, but many of those banks are in trouble and are reducing their loans.”

Cutting interest rates in these circumstances has been called as futile as “pushing on a string”.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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