Down for the count, the European Central Bank (ECB) cut borrowing costs by one-quarter percent to an historic low of one percent and adopted new monetary tools while leaving the door open to more rate reductions as it stepped up action to combat the recession. The widely flagged cut in the cost of money in the 16-member Eurozone followed signs of division emerging in the ECB’s 22-head rate-setting council on what new measures the bank should pursue to help spur economic growth. The ECB has now delivered rate cuts totaling 3.25 percent since October as inflation has dwindled and unemployment has jumped in the wake of the dramatic contraction in the world economy.

Speaking at a press conference, ECB chief Jean-Claude Trichet said the bank was planning to shore up financial market confidence by making its first move into asset purchases with the launch of a 60 billion Euro programme to buy up Euro-denominated covered bonds. In addition, the ECB is planning to extend the period over which the ECB lends funds to banks at fixed rates from six months to 12 month. Trichet also raised the prospect of further rate cuts, saying that the ECB’s 22-head rate-setting council had not decided that its new main rate was “the lowest level that we could never cross.”
It’s a far cry from last year when for months he resisted lowering the rate even as the US Federal Reserve Bank finally drove its rate down to zero percent to combat the recession. The two new non-conventional programs which Trichet said formed part of the bank’s “enhanced credit operation” are to be effectively launched after the next meeting of the bank’s governing council on June 4.

What is more, after a weaker-than-expected first quarter, Trichet expects the economic growth projection set out in the bank’s staff projections to be significantly revised down next month. “The ECB’s day of reckoning has arrived,” John Higgins, economist with the economics research group Capital Economics told Deutsche-Presse-Agentur (dpa.)
The meeting followed criticism of the ECB for its relatively cautious response to the global recession with other leading central banks such as the US Fed and the Bank of England (BoE) having moved quickly to trim rates and mobilise non-standard measures to help break the credit crunch. Both the US monetary authorities and the BoE have already reduced rates to about as low they are likely to go - between zero and 0.25 pe cent in the case of the US and 0.5 percent in Britain.

Meeting in London, the BoE announced it had left interest rates unchanged at 0.5 percent but said it would increase its programme of quantitative easing (QE) to GBP 125 billion (140 billion Euro.) The QE scheme, under which the central bank aims to boost liquidity by buying up bank and corporate assets - in effect printing money - was adopted earlier this year with an initial GBP 75 billion (84 billion Euro). The ECB’s measures included the purchase of assets from banks to bolster the amount of money in the economy or, more likely, extending the period over which the ECB lends funds to banks at fixed rates. The meeting also came against the backdrop of further signs of weakening inflation and the dramatic impact on the Eurozone economy of the global slowdown adding pressure to the ECB to further ease monetary policy.

Figures released in the run-up to the meeting showed Eurozone industrial producer prices chalking up their biggest drop in 22 years in March. Economists also expect Eurozone inflation to sink further from its current low of 0.6 percent. The ECB’s governing council also had to strike a balance between often disastrous hard economic data and a slew of forward-looking indicators pointing to an economic pickup emerging in the run-up to the end of the year.

Data released while the ECB governing council was deliberating in Frankfurt showed German factory orders posting a surprise jump in March, in what is one of the first signs of a pickup in key hard data for Europe’s biggest economy since it slumped into recession last year. But the European Commission slashed its economic projections, saying Europe’s economy would shrink by four percent this year, doubling what was then thought to be the dire predictions it made at the start of the year.

At the same time, the Commission forecast European unemployment would soar to about 11 per cent by the end of 2009. The Commission report came just a few days after the commission’s closely watched sentiment survey showed economic confidence in the Eurozone bouncing back in April as cautious optimism took hold across the currency bloc. This coincided with talk of better economic times ahead also emerging from the world’s two powerhouse economies - the United States and China.