The ECB decided today to cut the interest rate on its main refinancing operations by a further 25 basis points to 1.00%. This was in-line with market expectations. Out of the 58 analysts surveyed by Bloomberg ahead of the decision, only 1 analyst expected the ECB to leave rates unchanged, while two analysts expected rates to be cut by 50bps.
Earlier this year, the ECB hiked interest rates twice by 25bps each time (on 13 April 2011 and again on 13 July 2011), citing concerns about inflation. Inflation in the Euro-area has been above the target rate of 2% since December 2010, and is currently still at 3% - the highest level in 3 years. However, the new President of the ECB, Mario Draghi, who took over from Jean-Claude Trichet at the end of October 2011, has clearly responded to the worsening economic conditions and the increased risk that the Euro-area lapses back into recession during 2012.
The mandate of the ECB is primarily to ensure price stability. Once price stability is achieved, the ECB can then focus on encouraging employment and economic growth. However, most analysts expect Euro-area inflation to moderate meaningfully next year, and agree that the most pressing concern is the rapidly weakening economic environment. On reflection, the ECB should simply not have hiked interest rates earlier this year.
The focus is now firmly on the outcome of the EU summit, which takes place today and tomorrow; but may drag on into the weekend.
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