ECB cuts key rate to new low to help economy

[July 05, 2012]  FRANKFURT, Germany (AP) -- The European Central Bank has cut its key interest rate by a quarter percentage point to a record low of 0.75 percent to boost a eurozone economy weighed down by the continent's crisis over too much government debt.

The move followed a rate cut by China's central bank and new stimulus measures by the Bank of England as global financial authorities seek to shore up a slowing global economy.

European leaders last week agreed on new steps to strengthen market confidence in their shared euro currency bloc. They set up a single banking supervisor to keep bank bailouts from bankrupting countries and made it easier for troubled countries to get bailout help.

Those steps helped calm financial markets, which have expected the ECB to follow up with more help in the form of a rate cut.

The cut in the refinancing rate could mean lower borrowing costs for banks, businesses and consumers. The rate is what banks pay the ECB for loans and through them influences many other rates in the economy. In theory cheap borrowing makes it easier for businesses and people to decide to spend, but some economists say it may have little effect since interest rates are already very low.

The ECB also cut its overnight deposit rate -- what it charges banks for depositing their money with the ECB overnight -- to zero. That encourages banks to lend to one another rather than stash it with the ECB. However, cutting the rate to zero does not eliminate the reason banks are often reluctant to lend to each other: fear that other banks may become insolvent and not pay the money back.

Lending activity has remained weak because businesses are not asking for credit because of the slow economy and out of fear that the eurozone may suffer a further financial calamity. Concerns remain that bankrupt Greece could eventually leave the euro, causing more turmoil, or that Spain and Italy could need bailouts that would strain the resources of donor countries.

The ECB move comes as central banks around the globe remain under pressure to take more action to support growth, even after expending much of their monetary ammunition already by slashing interest rates and increasing the supply of money in their economies. The Bank of England also added more stimulus Thursday, deciding to purchase another 50 billion pounds in securities to increase the money supply in the UK economy.

China's central bank earlier in the day cut interest rates for the second time in a month to shore up its economy, the second-largest in the world.

[Associated Press; By DAVID McHUGH]

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