BLBG: ECB Cuts Rates as Risk of Greek Euro Exit Grows
The European Central Bank unexpectedly cut interest rates as Italian and Spanish borrowing costs soared after euro-area leaders raised the prospect of Greece exiting the monetary union.
ECB officials, meeting under the presidency of Mario Draghi for the first time, lowered the benchmark interest rate by 25 basis points to 1.25 percent, wrong-footing 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point reduction.
European leaders last night raised the prospect of the 17- member area splintering, with France and Germany saying they would treat Greece’s surprise referendum on a second bailout as a vote on its euro membership. With the region’s economic slowdown deepening and investors growing increasingly concerned, the ECB was under pressure to reverse this year’s two rate increases.
“The timing is surprising,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “The decision is the right one. There will be further rate cuts going forward. The European economy is probably already in recession and events over the past days have significantly increased downside risks.”
The euro fell almost a cent on the announcement to $1.3732.
Draghi holds a press conference at 2:30 p.m. in Frankfurt to explain today’s decision. He is also under pressure to increase the central bank’s commitment to buying the bonds of distressed euro states.
Italian Yields
Italian bond yields surged to euro-era records earlier today on concern the debt crisis will engulf other highly- indebted nations in the 17-nation currency bloc.
Italy’s 10-year yield jumped to as high as 6.39 percent, a euro-era record, widening the spread over benchmark German bunds to 462 basis points. Spain’s 10-year yield rose 10 basis points to 5.53 percent.
The ECB needs to “go into the market and say ‘We have a wall of money here and no matter how much speculation there is, we’re going to keep buying Italian bonds or any other euro bonds that are threatened’,” Irish Finance Minister Michael Noonan told Dublin-based RTE Radio yesterday.
Draghi, 64, has to try to forge consensus on a 23-member Governing Council already split over the ECB’s bond purchases, which now amount to 173.5 billion euros ($239.4 billion).
‘Downside Risks’
The U.S. Federal Reserve yesterday refrained from taking any additional policy steps while saying there are still “significant downside risks” to the economic outlook.
Recent data indicate the euro region is edging toward a recession.
Unemployment in Germany, Europe’s largest economy, unexpectedly rose for the first time in more than two years in October and Europe’s manufacturing industry contracted for a third month.
While the current inflation rate of 3 percent is well above the ECB’s 2 percent limit, weaker growth and demand may drive down oil prices. The ECB currently forecasts inflation will slow to 1.7 percent in 2012.
The Organization for Economic Cooperation and Development on Oct. 31 lowered its growth forecast for the U.S. and the euro area. The U.S. economy, the world’s largest, will expand 1.7 percent this year and 1.8 percent next, the Paris-based OECD said. By contrast, the euro area’s will grow 1.6 percent in 2011 and just 0.3 percent in 2012, it said.
To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net; Jeff Black in Frankfurt at jblack25@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
