FRANKFURT – The European Central Bank on Thursday cuts its main interest rate by a quarter point to 0.25 per cent, a record low, to help the economic recovery.
The ECB is the issuer of the euro currency and serves as the top monetary authority for the eurozone and its 331 million people. The bank and its president, Mario Draghi, have played a key role in fighting the government debt crisis afflicting the 17 European Union member countries that use the euro.
Some of the key steps the ECB has taken:
LOWER INTEREST RATES: The ECB has cut its key interest rate five times since Draghi become president. Before Thursday’s cut, it last reduced rates in May. It also then cut the rate it pays banks for deposits to zero — a push for them to lend rather than hoard money.
The refinancing rate is what the bank charges on the credit it offers to eurozone banks and thereby influences interest rates on the loans banks provide to each other, businesses and consumers. Theoretically, a lower rate makes it cheaper to borrow money and expand a business. In practice, a slack economy has meant weak demand for loans.
FORWARD GUIDANCE: The ECB underlined in June that rates will stay the same or lower “for an extended period.” That reversed its policy that it would “never pre-commit” on its monthly rate decisions.
UNLIMITED BOND BUYS: In 2012, high borrowing costs were threatening to push indebted countries such as Italy and Spain into a financial collapse that could have broken up the euro.
Draghi took a major step toward calming the eurozone crisis by announcing last year that “within our mandate, the ECB is ready to do whatever it takes to preserve the euro.”
The ECB then offered to purchase unlimited amounts of bonds issued by heavily indebted countries. The purchases would lower borrowing costs for indebted governments because they would drive up bond prices up and interest yields down, since prices and yields move in opposite directions.
The ECB has actually bought no bonds. The mere fact that the offer exists, however, affected the bond market and lowered borrowing costs for countries such as Spain and Italy.
CHEAP LOANS TO BANKS: The ECB made unlimited cheap, three-year loans available to banks on two occasions. In December 2011, 523 banks borrowed 489 billion euros ($608.17 billion) and 800 banks borrowed 530 billion euros in a second operation in February 2012.
The long duration gave banks security because they would have the money they needed through 2015. It eliminated market fears that one or more banks might collapse and thus made it easier for banks to borrow money and function in support of the wider economy. Some of the money is now being repaid by banks under a provision that lets them give the money back after a year.
ALL YOU WANT: The ECB said Thursday it will extend its offer of unlimited credit to banks at its short-term loan offerings — typically one week, one month and three months — through the end of 2015. It had previously planned to offer them until the middle of next year. The offer reassures banks and their creditors that they will be able to get financing to meet their obligations.