This article is from the source 'bbc' and was first published or seen on . It last changed over 40 days ago and won't be checked again for changes.

You can find the current article at its original source at http://www.bbc.co.uk/go/rss/int/news/-/news/business-16082755

The article has changed 9 times. There is an RSS feed of changes available.

Version 4 Version 5
European Central Bank cuts interest rates back to 1% European Central Bank cuts rates and unveils bank help
(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. ECB President Mario Draghi also unveiled new support measures for eurozone banks, but played down the prospect of any new financial support for struggling governments.
ECB President Mario Draghi called again for governments to cut their borrowing and reform their economies, but did not mention any new financial support from the ECB for struggling governments. The moves come just ahead of a "do-or-die" Brussels summit of EU heads to hammer out a plan to save the euro.
"We have a treaty that says no monetary financing to governments," he said in response to a question on the subject at a post-meeting news conference.
The euro, which had risen following the announcement of the interest rate cut, fell more than a cent against the dollar while Mr Draghi was speaking.The euro, which had risen following the announcement of the interest rate cut, fell more than a cent against the dollar while Mr Draghi was speaking.
There has been speculation that the ECB may be preparing to bail out Italy if eurozone governments agree tough new limits on their borrowing and economic reforms. Stock markets also fell, with the French Cac 40 index dropping 2.5%, and Italy's FTSE MIB down 3%.
Mr Draghi said that as well as cutting their spending and/or raising taxes, governments had to make their labour markets more flexible and open up product markets to more competition in order to boost growth. He also praised the efforts of the new Italian government. There had been speculation that the ECB may be preparing to bail out Italy if eurozone governments agree tough new limits on their borrowing and economic reforms.
But Mr Draghi seemingly ruled this out: "We have a treaty that says no monetary financing to governments."
RecessionRecession
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.
The rate cut, only days after 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 rate cut, only days after 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 record low 1% level that prevailed from the summer of 2009 to the end of 2010, in response to the global financial crisis and recession.
Mr Draghi confirmed that the decision was not made unanimously. Some German central bankers have expressed opposition to what they see as excessively loose monetary policy.Mr Draghi confirmed that the decision was not made unanimously. Some German central bankers have expressed opposition to what they see as excessively loose monetary policy.
The central bank again cut its forecast for economic growth in the eurozone next year, to a range of 1% growth to a 0.4% contraction - raising the prospect of a recession.The central bank again cut its forecast for economic growth in the eurozone next year, to a range of 1% growth to a 0.4% contraction - raising the prospect of a recession.
The lower forecast may herald further interest rate cuts.The lower forecast may herald further interest rate cuts.
On inflation, Mr Draghi echoed the line taken by the Bank of England, saying that the rate - currently 3% - would remain above its 2% target for several months, but that the central bank was concerned about the medium-term outlook.
"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.
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
"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 would break up. On inflation, Mr Draghi echoed the line taken by the Bank of England, saying that the rate - currently 3% - would remain above its 2% target for several months, but that the central bank was concerned about the medium-term outlook.
"The central bank does not have a mandate to do what is necessary to get us off this path." Bank support
However, Mr Draghi dismissed the prospect of a eurozone break-up as "quite far-fetched at this stage". Mr Draghi also announced further measures to support the eurozone's banks, including:
Italy plan
  • three-year loans to be available from 21 December
    •
  • more generous minimum standards for what the ECB will accept as collateral on the loans it makes
    •
  • a cut in the reserve ratio - the percentage of a bank's assets that must be held in cash at the central bank - from 2% to 1%.
    •
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 GDP. The ECB president explained the measures were intended to head off a credit crunch affecting companies and mortgage borrowers.
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).
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.
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 had 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.
But Mr Draghi expressed his surprise at this interpretation in his news conference, and put the onus back on the EFSF as the primary means for the eurozone to support crisis-struck governments.
Italy's 10-year cost of borrowing had risen above the 7% level widely deemed to be unsustainably expensive, but fell back below 6% in recent days, in expectation of an ECB bailout.
Following Mr Draghi's press conference, it rose back up again to 6.3%.
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.
Mr Draghi played down the prospect that the ECB would ramp up its purchases.
Bank collapse
The ECB also announced 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.
Italy plan
Meanwhile, 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 GDP.
Mr Draghi called again for governments to cut their borrowing, and to boost growth by making their labour markets more flexible, and opening up product markets to more competition.
He also praised the efforts of the new Italian government.
The summit 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).
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.
But Mr Draghi put the onus back on the EFSF as the primary means for the eurozone to support crisis-struck governments.
Italy's 10-year cost of borrowing had risen above the 7% level widely deemed to be unsustainably expensive, but fell back below 6% in recent days, in expectation of an ECB bailout.
Following Mr Draghi's press conference, it rose back up again to 6.3%.
The ECB gas been providing some support to Italy and Spain, by buying up their debts in the financial markets.
But Mr Draghi played down the prospect that the ECB would ramp up its purchases.
"What we need to see is a dramatic and meaningful U-turn at the ECB," Graham Neilson, chief investment strategist at hedge fund Cairn Capital, told the BBC.
He said that without a commitment by the ECB to provide massive financial support to Italy and other struggling governments, the eurozone would break up.
"The central bank does not have a mandate to do what is necessary to get us off this path."
However, Mr Draghi dismissed the prospect of a eurozone break-up as "quite far-fetched at this stage".