ECB Cuts Interest Rates as New Chief Draghi Takes Bold Step

In a surprise move, the European Central Bank (ECB) cut its key interest rate to 1.25 percent from 1.50 percent, in the same week that Mario Draghi took over as ECB president.

The rate reduction comes as European and other world leaders assemble in Cannes, France for the G20 summit to discuss the crisis in Greece and the Eurozone.

In October, the ECB said it would provide new emergency loans to beleaguered banks to assist them during the ongoing crisis on the continent. The central bank also announced it would help banks by spending some 40 billion euros ($55 billion) to purchase some of their assets.

Still, few analysts expected a rate cut to arrive so soon thereafter.

In July, the central bank had boosted rates from 1.25 percent to 1.50 percent, a move that generated much controversy and criticism at the time, given the persistently weak economic growth in the Eurozone. The former ECB chief Jean-Claude Trichet said the tightening was necessary to fight inflation.

Indeed, inflation in the Eurozone averages out to about three percent, well above the central bank’s two percent target.

At a press conference following the rate policy decision, Draghi said:” While inflation has remained elevated and is likely to stay above two percent for some months to come, inflation rates are expected to decline further in the course of 2012 to below two percent. At the same time, the underlying pace of monetary expansion continues to be moderate. After today’s decision, inflation should remain in line with price stability over the policy-relevant horizon.”

Howard Archer, chief European and U.K. economist, found the rate cut “fully justifiable.”

“With October Eurozone survey evidence bleak overall, the downside risks to the Eurozone growth outlook appear to be rapidly materializing with contraction looking ever more likely in the fourth quarter and potential recession looming,” he said.

“And the move also suggests that Mario Draghi will not be afraid to make bold decisions as there had been suspicion that he may be reluctant to see an interest rate cut at his first meeting, in case this made him appear soft on inflation given that the Eurozone consumer price inflation is currently well above target at 3.0% in October.”