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European Central Bank cuts interest rates back to 1% European Central Bank cuts interest rates back to 1%
(40 minutes later)
The European Central Bank has cut interest rates back to their historic low of 1%, as expected by markets.The European Central Bank has cut interest rates back to their historic low of 1%, as expected by markets.
The quarter-point cut comes as crisis and recession threaten the eurozone.The quarter-point cut comes as crisis and recession threaten the eurozone.
The decision comes just ahead of a "do-or-die" Brussels summit of EU heads to hammer out a plan to save the euro.The decision comes just ahead of a "do-or-die" Brussels summit of EU heads to hammer out a plan to save the euro.
All eyes will now be on the ECB President, Mario Draghi, at a post-meeting press conference. The ECB is also thought to be preparing a bailout for the Italian government.All eyes will now be on the ECB President, Mario Draghi, at a post-meeting press conference. The ECB is also thought to be preparing a bailout for the Italian government.
It is the second such rate cut since Mr Draghi took over the ECB presidency last month.It is the second such rate cut since Mr Draghi took over the ECB presidency last month.
Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full		 Crisis jargon buster Use the dropdown for easy-to-understand explanations of key financial terms:
AAA-rating The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule. Glossary in full
The first cut, the day he took over, reversed the central bank's policy direction. Under his predecessor, Jean-Claude Trichet, the ECB had begun raising rates over the summer to ward off higher inflation.The first cut, the day he took over, reversed the central bank's policy direction. Under his predecessor, Jean-Claude Trichet, the ECB had begun raising rates over the summer to ward off higher inflation.
The second cut has returned rates to the 1% level that prevailed from the summer of 2009 to the end of 2010, in response to the global financial crisis and recession.The second cut has returned rates to the 1% level that prevailed from the summer of 2009 to the end of 2010, in response to the global financial crisis and recession.
There is speculation that Mr Draghi may be planning to push interest rates down to almost zero by next year, and then embark on a programme of "quantitative easing" - buying up government debts - similar to that already implemented by the US Federal Reserve and the Bank of England. "What we are seeing from the ECB is pretty much 'more of the same'," said Graham Neilson, chief investment strategist at hedge fund Cairn Capital.
"What we need to see is a dramatic and meaningful U-turn at the ECB," he adds, saying that without a commitment by the ECB to provide massive financial support to Italy and other struggling governments, the eurozone will break up.
"The central bank does not have a mandate to do what is necessary to get us off this path."
Italy planItaly plan
The two-day EU summit ending on Friday is expected to agree tough new rules and automatic fines to ensure that eurozone governments cut their borrowing to below 3% of their GDPs.The two-day EU summit ending on Friday is expected to agree tough new rules and automatic fines to ensure that eurozone governments cut their borrowing to below 3% of their GDPs.
It will also seek to boost the eurozone governments' own bailout capacity.It will also seek to boost the eurozone governments' own bailout capacity.
Leaders still hope to find a way to double or triple the size of the eurozone governments' bailout fund - the European Financial Stability Facility (EFSF) - from its current 440bn euros (£375bn; $590bn).Leaders still hope to find a way to double or triple the size of the eurozone governments' bailout fund - the European Financial Stability Facility (EFSF) - from its current 440bn euros (£375bn; $590bn).
However, in recent weeks, financial markets have signalled that they do not view the EFSF as a credible solution to the crisis, because Italy and its debts are seen as simply too big for other eurozone governments to rescue.However, in recent weeks, financial markets have signalled that they do not view the EFSF as a credible solution to the crisis, because Italy and its debts are seen as simply too big for other eurozone governments to rescue.
Attention has instead turned to the ECB and its potentially unlimited ability to create the euros needed to rescue Italy.Attention has instead turned to the ECB and its potentially unlimited ability to create the euros needed to rescue Italy.
Last week, Mr Draghi hinted at "robust action" in a speech to the European Parliament, but highlighted the need for governments to take the lead, saying that "sequencing matters".Last week, Mr Draghi hinted at "robust action" in a speech to the European Parliament, but highlighted the need for governments to take the lead, saying that "sequencing matters".
This has been widely interpreted as a demand for an agreement on government borrowing limits in Brussels on Friday as a precondition for the ECB rescuing Italy.This has been widely interpreted as a demand for an agreement on government borrowing limits in Brussels on Friday as a precondition for the ECB rescuing Italy.
Italy's 10-year cost of borrowing - which had risen above the 7% level widely deemed to be unsustainably expensive - has fallen back to 6.125% in expectation of an ECB bailout.Italy's 10-year cost of borrowing - which had risen above the 7% level widely deemed to be unsustainably expensive - has fallen back to 6.125% in expectation of an ECB bailout.
Analysts expect think this rescue may take the form of a loan from the central bank to the International Monetary Fund. Analysts think this rescue may take the form of a loan from the central bank to the International Monetary Fund.
The IMF would then in turn provide the loans - with tough conditions attached - needed by Rome.The IMF would then in turn provide the loans - with tough conditions attached - needed by Rome.
The ECB is banned from lending directly to eurozone governments, although this has not stopped it from buying up existing Italian and Spanish debts in the financial markets. However, Mr Neilson at Cairn Capital is not optimistic: "There might be something, but the amounts involved are minuscule."
The ECB is banned from lending directly to eurozone governments.
But this has not stopped it from buying up existing Italian and Spanish debts in the financial markets, and it could choose to significantly ramp up its purchases.
Bank collapseBank collapse
The ECB is also expected to announce further measures to support the eurozone's banks.The ECB is also expected to announce further measures to support the eurozone's banks.
Some banks have increasingly been relying on existing emergency loans from the ECB, as they find it harder to borrow money from markets.Some banks have increasingly been relying on existing emergency loans from the ECB, as they find it harder to borrow money from markets.
Meanwhile, other, stronger, banks have been depositing more cash with the central bank - a sign that they do not trust lending the money to their peers.Meanwhile, other, stronger, banks have been depositing more cash with the central bank - a sign that they do not trust lending the money to their peers.
Last week, the ECB joined with the US Federal Reserve, the Bank of England and three other major central banks in announcing an agreement that would ensure that their banks had access to foreign currency emergency loans.Last week, the ECB joined with the US Federal Reserve, the Bank of England and three other major central banks in announcing an agreement that would ensure that their banks had access to foreign currency emergency loans.
The surprise move sparked speculation that one or more major European banks could be on the point of collapse, because of their inability to borrow in US dollars.The surprise move sparked speculation that one or more major European banks could be on the point of collapse, because of their inability to borrow in US dollars.
Meanwhile, banks in Greece are facing an accelerating withdrawal of deposits by ordinary citizens worried that the country may soon exit the eurozone.Meanwhile, banks in Greece are facing an accelerating withdrawal of deposits by ordinary citizens worried that the country may soon exit the eurozone.
Greece's central bank governor, Georgios Provolopoulos, told Germany's Der Spiegel magazine on Tuesday that the bank run was making it harder for the Greek banks to support the country's economy.Greece's central bank governor, Georgios Provolopoulos, told Germany's Der Spiegel magazine on Tuesday that the bank run was making it harder for the Greek banks to support the country's economy.
The ECB has been providing the cash needed by Greek banks to pay out to their fleeing depositors.The ECB has been providing the cash needed by Greek banks to pay out to their fleeing depositors.
But this has, in turn, put strains on the system of eurozone central banks and has increased the ECB's exposure to potential losses if Greece does ultimately stop paying its debts or leave the eurozone.But this has, in turn, put strains on the system of eurozone central banks and has increased the ECB's exposure to potential losses if Greece does ultimately stop paying its debts or leave the eurozone.