ECB surprises markets with rate cut

[November 07, 2013]  FRANKFURT, Germany (AP) -- The European Central Bank has startled investors with a surprise cut in its benchmark interest rate.

The bank lowered the benchmark refinancing rate to a record low 0.25 percent from 0.5 percent at a meeting of its 23-member governing council in Frankfurt.

Recent economic data such as lower than expected inflation of 0.7 percent have suggested that Europe's economic recovery remains weak. But most economists thought the bank would wait to offer more economic stimulus at least until December when it will have new forecasts from its own staff.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

An uncertain economic recovery has fueled discussion that the European Central Bank might take more steps to boost growth -- such as cut its benchmark interest rate or make more cheap loans to banks.

Most analysts, however, say it's unlikely that will happen at Thursday's meeting of the bank's 23-member governing council.

Analysts say the bank will likely keep its benchmark rate at the current record low 0.5 percent and will at least wait to see its own inflation and growth forecasts, available at December's meeting. A couple of analysts have predicted a rate cut Thursday.

Buzz over possible ECB action has increased recently because the eurozone still faces headwinds. Low annual inflation of only 0.7 percent in October underlines that the recovery is less than robust. Bank lending remains weak, as companies find borrowing too risky. The ECB's low interest benchmark is not being passed to businesses by banks with strained finances in some countries. A recently stronger euro could hurt exports. Unemployment is high at 12.2 percent, hurting consumer willingness to spend.

The 17 European Union member countries that use the shared euro currency returned to growth in the second quarter, with a modest 0.3 percent increase in output.

Analyst Carsten Brzeski at ING said the rate-cut talk was "moving in circles." ''Speculation about further rate cuts is nothing new," he wrote in a note to investors, predicting no cut. "Neither are the arguments against rate cuts."

Here are steps the bank could take:

• Cut its benchmark rate at which it loans to banks. That would theoretically lower borrowing costs for businesses and consumers and stimulate growth. As rates are already low, it might be mostly symbolic.

• Announce another round of unusually long-term cheap loans to banks. Two previous 3-year loan offers helped the steady the banking system in 2011 and 2012. More cash could make it easier for banks to loan to businesses, in theory anyway. Yet banks often used the earlier loans to buy government bonds, not for loans.

• Cut the amount of money banks are required to keep on reserve at the ECB, freeing more cash.

• Stop taking weekly deposits from banks, which drain ready cash from the banking system to offset the monetary effects of bond purchases that have been discontinued. Halting the deposits would leave that money with the banks.

• ECB President Mario Draghi could try to talk the euro down by saying that the ECB considers the stronger euro a risk to growth or price stability. That could make foreign exchange markets less likely to bet against the euro.

[Associated Press; By DAVID McHUGH]

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