As expected, the European Central Bank went forward with its first rate cut since July 2012, responding to market consensus that was looking for the bank to announce a 25 basis point cut in rates to 0.50 percent. The ECB’s 23-member Governing Council voted on Thursday to slash the main refinancing rate from 0.75 percent to a new all-time low of 0.25 percent. Moreover, the bank kept the deposit facility at a rate of zero to avoid negative rates that will harm banks at this stage that remain fragile. Market bulls were markedly relieved against the backdrop of the ECB’s policy outcome, given rate cut expectations were running too high. The ECB is the first bank to cut rates this year, acting to bolster euro-area growth. The 17-nation bloc is now in its longest recession ever. The unexpected contraction in Europe’s largest economy, falling annual inflation as well as soaring unemployment, left the ECB at crossroads for a change. Well, a debate policy easing was the cue at the bank’s last couple of meetings, when it kept policy on hold, but pointed towards a strong possibility of a near term change, perhaps a near cut in interest rate! ECB President Mario Draghi signaled the economy will gradually recover later this year, however the hoped-for recovery hasn’t’ started yet; unemployment is still on the rise, reaching 12.1 percent in April. Last month, Draghi altered his tone. He downplayed his upbeat view of near revival, signaling “downside risks” to growth amid signs the hoped-for recovery in late 2013 could be delayed as economic woes deepen. The euro-area economy unexpectedly contracted 0.6 percent in the last three months of 2012. The ECB said in its latest forecast that the euro area will shrink 0.5 percent this year amid growing downside risks. The constantly weak fundamentals of the 17-nation economy are not helping the recovery at all, as unemployment hit new sky-high records in many euro nations, while inflation continues to drop at a very sharp rate. Data released this week showed that euro-area annual inflation fell to lowest level in April since February 2010, at 1.2 percent, comfortably below the central bank’s inflation target of 2 percent over the medium term. Despite increasing calls for a cut in interest rate, some economists believe that such an act is unlikely to have any impact on the 17-nation economy, which has been in recession for a little over year until now. Focus turns to the ECB press briefing which begins at 1230GMT.
