The widely-anticipated drop of 0.25bps was announced at a press conference this afternoon, the first time the interest rate has been reduced since July 2010.
The euro rose following the announcement, only to tumble to a new low one hour later when Mario Draghi said the bank would consider taking the deposit rate, currently at 0%, into negative territory to stimulate lending.
The euro fell 0.6% to 84p against the pound and to below $1.31 against the dollar.
Trouble ahead for the euro?
Andy Scott, premier account manager at foreign currency exchange brokers HiFX , said: “If they were to cut the deposit rate to a negative figure to encourage banks to lend money out rather than leave it on deposit with the central bank, this would of course be negative for the single currency.
“We continue to favour a move to 1.20 for sterling against the euro in the near term given the recent run of better than expected data from the UK.”
Positive steps away from austerity
The move is positive, but increasing lending to SME’s is arguably the best way to stimulate the economy, according to Nancy Curtin, CIO at Close Brothers, who suggested the ECB introduce a Funding for Lending equivalent.
Curtin said: “We may not have seen it reflected in overt policy until this point, but it’s clear European policymakers are taking on board the fiscal impact of austerity as unemployment across the Eurozone hits a record high, becoming more flexible to try and prevent a downward spiral across the Eurozone. While trimming rates should bolster public confidence, by itself it may not be enough to stimulate increased economic activity.”
Last week Santander announced that it had increased its SME lending year on year by 15% over the past 12 months.
Too little too late
Elsewhere commentators argue the cut is too little, too late and the move is addressing a symptom rather than the cause of the crisis.
Neil Williams, chief economist for Hermes’ global government & inflation bonds, said: “While remaining worse than their pre-crisis levels, Germany, France, and the other core countries will be able to offer little growth impulse to lift the periphery.
“Telling would be if the ‘taste left in the mouth’ from Cyprus’ deposit haircuts reduces the likelihood that Spain, for example, seeks bail-out help. Politicians may now fear that electorates will fret about their own deposits.
“With disparities and anomalies persisting, the eurozone’s woes will carry over – no matter how quickly the US expands. Given fiscal austerity, we estimate the overall mix of eurozone policy (monetary and fiscal) will be the tightest since 2007. The ECB should have long reduced deflation risk by setting all main policy rates to zero, and may yet capitulate on some form of QE.”
Arguments persist over whether or not continued austerity measures are helping or hindering the recovery.
