ECB cuts rates, leaves door open for further easing

As widely anticipated, the European Central Bank (ECB) cut its main refinancing rate to 0.5 per cent from 0.75 per cent. This should provide distressed banks in the region’s periphery with some respite.

The ECB also put forward the prospect of further interest rate measures, including a deposit rate cut to less than zero per cent.

In addition, the supply of the banking system with cheap central bank liquidity has been prolonged until the middle of 2014.

During the press conference, ECB president Mario Draghi conceded that the weakness of economic activity in the region had continued into the spring.

Meanwhile, according to Markit Economics, a measure of manufacturing output in the euro area contracted to 46.7 in April from 46.8 in March. This is, however, above an initial estimate of 46.5. Readings of the index below 50 indicates contraction. This is the 21st consecutive monthly decline of the index, adding to pressure on the ECB to support lending and growth.

Separately, the EU statistics office, Eurostat, reported that the euro area unemployment rate rose to 12.1 per cent in March from 12 per cent in February. That is a record high but in line with the forecast of economists polled by Bloomberg News. The report shows that, 19.2 million people were unemployed in the euro area in March.

In the meantime, Eurostat also reported that in April, the headline inflation rate cooled to 1.2 per cent from 1.7 per cent a month earlier. This is the lowest annual inflation rate since February 2010.

Finally, in the US, the Federal Open Market Committee decided to leave interest rates at the current record low levels. Furthermore, Fed officials said they would continue their $85-billion (65bn)-a-month bond-buying programme, and signalled they could either increase or decrease the amount they purchased monthly, depending on the job market and inflation.

In the meantime, data showed that the US economy grew at the lower-than-expected rate of 2.5 per cent during the first quarter, which was negatively affected by a fall in defence spending.

This article was compiled by Bank of Valletta plc for general information purposes only.