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The ECB cut the main refinancing rate by 25bps to 1.25%

November 4, 2011

The ECB lowered the main refinancing rate by 25bps to 1.25% in a move that surprised versus median analyst forecasts for an unchanged rate of 1.50%. The entire rate corridor was shifted down 25bps, bringing the marginal lending rate to 2.00% and the deposit facility rate to 0.50%. President Draghi and the rest of the Governing Council clearly decided to look beyond the supposed risks to their inflation-fighting credibility if they were to cut today, and opted to provide additional policy support at the margin for banks and borrowers in the face of weakening economic activity and extreme downside risks stemming from the Eurozone crisis and tensions in financial markets. President Draghi did not clearly signal that another rate cut was likely in December, and the text of the introductory statement noted that “after today’s decision inflation should remain in line with price stability over the policy-relevant horizon.” Today’s cut was the first since May’09 and President Draghi confirmed that the decision was unanimous.

The eurofell after the rate cut decision to 1.366, near the low on the day, but has since popped up to 1.376 on reports that the Greek parliament could reach an agreement to support the latest programme from Eurozone leaders’ and thus avoid a public referendum on the programme or the question of Eurozone membership itself. During the press conference, President Draghi noted that the ECB is closely monitoring the rapidly evolving situation in Greece, but overall, Mr. Draghi’s tone and responses to questions confirmed strong support for the ECB’s limited mandate of providing price stability, and he stressed the need for national governments to meet their own responsibilities.

In explaining why the Council cut this month, President Draghi focused on the deterioration in the growth outlook since the last meeting and the potential dampening effect on prices, costs and wages. Although HICP inflation remained at 3.0%YoY according to the “flash” October estimate and is expected to remain above 2% “for some months to come,” it is then expected to fall below 2% during 2012 on account of base effects and in response to the weaker growth environment. Today’s rate cut was taken despite the fact that the Governing Council still officially views the risks to inflation as “broadly balanced,” but President Draghi said in the press conference that there is no threat to price stability from the rate cut of 25bps.


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