Following yesterday’s 0.25% cut to the base rate, which took it to 1.25%, further loosening is expected now Mario Draghi has taken over as President of the ECB.
In his first press conference, Draghi pointed to downside risks to growth and admitted he expects a "mild recession" to take hold in the eurozone towards the end of the year.
Azad Zangana, European economist at Schroders, said: "Overall, the cut in interest rates is unlikely to have much of an impact on the real economy. Money market rates have been trading well below the ECB’s policy rate ever since the re-introduction of three-month liquidity auctions."
He added that the central bank was likely to take interest rates back to 1% in the near term, with pressure from the Greek drama being sustained.
Draghi took over from the more hawkish Jean-Claude Trichet and has already been cast as a dove by many observers.
Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, said: "We saw a growth-focused, dovish speech from Draghi which sounded more like Ben Bernanke than his predecessor Trichet.
"He put much emphasis on growth, mentioning manufacturing surveys, growth forecast downgrades and financial conditions to explain his quarter point rate cut. This suggests another rate cut in a month’s time."
Trichet previously hiked rates twice this year, by 0.25% in both April and July. His argument at the time was that it was up to domestic governments to cut their debt levels and that he was focused on keeping inflationary pressures under control.
As the sovereign debt crisis has continued to drag on, however, it seemed increasingly likely the ECB would have to reverse its policy and the departure of Trichet has given the Bank the opportunity to do so.
Sandra Holdsworth, fixed income investment manager at Kames Capital, agreed the rate cut had been on the cards for months.
"The economic and political outlook in the eurozone has been deteriorating for some months now. Even in Germany the latest employment report showed the first increase in unemployment since 2009.
"Even sharper increases have been seen in some of the other countries of the eurozone and the Central Bank has finally realised there are more downside risks to the current level of inflation at 3% than upside ones," she said.
Earlier in the week the Federal Open Market Committee left rates on hold between 0% and 0.25% and announced no further implementation of Operation Twist, this accompanying statement was also seen as slightly more hawkish, although practically speaking the Fed has little room to loosen monetary policy further.
Meanwhile, at a meeting with the Council of Mortgage Lenders, deputy chairman of the Bank of England, Charles Bean admitted the Bank had been close to raising rates in the UK before the European crisis took a firm hold.
He said as recently as the May meeting a third of the Committee was supportive of raising interest rates from the record-low of 0.5%.
Next week the BoE is widely-anticipated to keep rates on hold and the announcement of further quantitative easing wouldn’t be out of the question.
