European Central Bank Announces Surprise Rate Cut
FRANKFURT, Germany – The European Central Bank unexpectedly cut its main interest rate by a quarter percentage point Thursday to 4.5 percent, joining a global trend of rate cuts amid volatile stock markets and a slumping world economy.
The cut, only the second in the ECB's two-year history, indicated the Frankfurt-based central bank is finally bowing to criticism that it was doing too little to shield Europe from a global slowdown.
Most economists had expected the ECB to stick to its ``wait-and-see'' policy and focus on curbing the hreat of rising prices. After the ECB announcement, Europe's 12-nation euro currency immediately shot up half a cent to above 89 U.S. cents.
With the cut, the ECB joined the U.S. Federal Reserve and the Bank of Japan in a wave of interest rate cuts this year. The Bank of England also cut its base rate by a quarter percentage point Thursday to 5.25 percent, its third cut this year.
Politicians and top international economists have exhorted the ECB to cut rates for countries sharing the euro. The idea is to protect the region's economy against the slump.
But the pleas had softened somewhat after last month's summits of European and Group of Seven finance officials, where ECB officials vigorously campaigned for their monetary policy. Most economists had expected the ECB to keep rates unchanged Thursday and focus instead on capping inflation.
The two-year-old ECB, still struggling to establish its policy-making independence, does not have the broad charter of the U.S. Federal Reserve to tackle inflation as well as economic growth. Its primary target is inflation alone, and keeping interest rates high is one way to cap spiraling prices.
Rising prices remain a nagging concern for the region. March inflation hovered at 2.6 percent, well above the ECB's two-percent target.
Few economists had expected the ECB to make a move Thursday. Most believed, however, that the central bank would have to cut rates by summer when many predict the effects of the U.S. and Japanese slowdowns will begin to be felt in Europe.
Just last week, ECB President Wim Duisenberg hammered home his intent to check price rises when he said it could take until early next year for inflation to fall below the two-percent ceiling.
``It is now widely understood that a move on interest rates would not enhance the credibility of the ECB,'' Duisenberg said.
And European officials have remained adamant that there are no signs of an impending European recession that would require an immediate interest rate cut. Decreasing interest rates can spur economic growth by making its easier for business and consumers to borrow money and spend.
Forecasts for global growth are falling, but Europe is still expected to grow by a respectable 2.5 percent or so this year.
Riding out an economic slowdown while bringing down inflation would certainly boost the image of the ECB, which saw its credibility shrivel last year when the euro's exchange rate took a beating.