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Eurozone interest rate cut to record low
(Agencies)
Updated: 2009-05-07 22:57

FRANKFURT– The European Central Bank cut its main interest rate, probably for the last time, to a record low of 1.0 percent on Thursday.

Eurozone interest rate cut to record low
A Euro symbol in front of the European Central Bank (ECB) in Frankfurt, 2007. The European Central Bank cut its main interest rate for the seventh time, by 0.25 percentage points to a record low of 1.0 percent. [Agencies] 

But economists wanted to know how the ECB can boost bank lending further amid a deep recession.

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The decrease of 0.25 percentage points made for a combined cut of 3.25 points since early October to the lowest level in the bank's more than 10-year history.

The ECB lowered another reference rate, the marginal lending rate, to 1.75 percent, but left its deposit rate unchanged at 0.25 percent, a bank spokesman said.

The main, or refinancing, rate is that paid by commercial banks to borrow ECB funds for up to six months, while the deposit rate is what the central bank pays commercial banks that deposit money with it overnight.

In London, the Bank of England said meanwhile that it would pump out another 50 billion pounds (56 billion euros, 75 billion dollars) of new money and kept its main rate at a record-low 0.50 percent as Britain battled its own recession.

Eurozone economists turned quickly to what ECB president Jean-Claude Trichet might announce within a framework of so-called quantitative easing, or QE, at a press conference after the rate decision.

QE amounts to a central bank creating money to buy government or corporate debt with the goal of easing a dogged credit squeeze and spurring growth.

The measure most likely to be announced is an extension of the ECB's unlimited cash loans to commercial banks beyond the current limit of six months, to nine or 12.

An expanded range of collateral accepted in exchange for ECB funds is another move mooted by many, but UBS economist Stephane Deo said such measures "represent more of a prolongation of the past strategy than a step change."

Economists would like to see bolder moves, but might have to settle for Trichet presenting a few possibilities for the future.

QE has already been launched in various forms by the US Federal Reserve, whose main interest rate is essentially zero, and the Bank of England, whose latest move raised its new money supply to a total of 125 billion pounds.

The ECB has cut lending rates more slowly than peers and has shunned QE measures that are harder to apply across the 16-nation eurozone and which could favour some sectors or countries over others.

But the eurozone economy needs a serious boost, with activity set to contract by 4.0 percent this year as an historic recession drives unemployment to levels not seen since World War II.

Signs the recession could be nearing a trough have not eased fears that 8.5 million Europeans could lose their jobs in 2009 and 2010, driving the eurozone jobless rate to 11.5 percent next year.

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