ECB Lowers Interest Rates

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July 5, 2012/ By Tom Fairless and Geoffrey Smith/ WSJ

The European Central Bank cut its main interest rate to a historic low of 0.75% Thursday, as expected, offering a degree of relief to the euro-zone's faltering economy amid signs that inflationary pressures are fading.

ECB President Mario Draghi said the bank's decision was caused by the fact that the economic slowdown it had feared had materialized.

Mr. Draghi said that growth in the euro area remains weak, and that price pressures "should remain in line with price stability over the medium term."

He stressed that uncertainty over the economic outlook is still extremely high, but repeated the bank's existing forecast of a gradual recovery over the rest of the year.

The 0.25 percentage point cut—the ECB's first since December—was forecast by more than two-thirds of the analysts polled by Dow Jones Newswires, and takes rates below the 1% low that was hit in the wake of Lehman Brothers' 2008 collapse.

Although euro-zone inflation held steady at 2.4% in June, somewhat above the ECB's target of just below 2%, price pressures have eased steadily in recent months to a 16-month low, even as economic data increasingly point to the risk of a double-dip recession.

In a move that could help thaw frozen interbank markets, the central bank also cut its overnight deposit and lending rates by 0.25 percentage point each, to 0% and 1.50% respectively. Cutting the deposit rate could encourage banks to lend out excess funds overnight rather than stashing them at the ECB.

The euro plummeted against other major currencies after the ECB announcement.

The common currency dropped around 0.75% against the dollar, to as low as $1.2414, and the Japanese yen to ¥98.93. It also dropped around 0.5% against the Australian and New Zealand dollars as well as against the Swedish krona.

Money market rates also plunged following the move on expectations that some banks may now shift part of their funds away from the ECB's deposit window.

Earlier Thursday, two of the world's most important central banks had also eased policy, the Bank of England increasing its asset purchase program by £50 billion ($78 billion) to £375 billion, and the People's Bank of China cutting its benchmark interest rates.

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