The European Central Bank cut interest rates to a record low andsaid it won't pay anything on overnight deposits as the sovereigndebt crisis threatens to drive the euro region into recession.

Policy makers meeting in Frankfurt today lowered the ECB's mainrefinancing rate to 0.75 percent from 1 percent, as predicted by 49of 64 economists in a Bloomberg News survey. The ECB also cut itsdeposit rate to zero from 0.25 percent and its marginal lendingrate to 1.5 percent from 1.75 percent.

With Europe's debt crisis curbing growth across the continentand damping the global outlook, the ECB was under pressure to easemonetary conditions, even though Draghi last month voicedmisgivings about the effectiveness of a rate reduction. Whiletoday's moves may not stimulate demand, they will lower borrowingcosts for struggling banks and could build on the confidence boosteuro-area governments delivered last week when they took stepstoward a deeper economic union.

“The benchmark rate doesn't really matter at the moment, butcutting the deposit rate all the way to zero takes the ECB into newterritory,” said James Nixon, chief European economist at SocieteGenerale SA in London. “If you can kick-start the money market yougo a long way to addressing some of the funding problems that banksface. That may free banks to lend to the economy.”

The euro fell more than half a cent after the ECB decision to$1.2445 at 1:57 p.m. in Frankfurt.

Central banks around the globe are easing policy in response toEurope's debt crisis, which has pushed at least seven euro nationsinto recession and forced five of them to seek bailouts.

The Bank of England, which has been drawn into the scandal overBarclays Plc's rigging of Libor rates, today raised its target forbond purchases by 50 billion pounds ($78 billion) to 375 billionpounds. The U.S. and Australian central banks eased monetary policylast month and China cut rates today.

In Europe, bond and equity markets rallied last week aftereuro-area leaders opened the way to recapitalizing banks directlywith bailout funds once a single banking supervisor is established.They also dropped the requirement that taxpayers get preferredcreditor status on aid to Spain's crippled lenders.

Deposit Rate

Yields on Spanish 10-year bonds fell to 6.25 percent yesterdayfrom 6.94 percent on June 28. They rose to 6.53 percent thismorning.

A deposit rate of zero may encourage banks to lend to otherinstitutions, companies or households instead of parking excesscash in the ECB's overnight deposit facility. About 800 billioneuros ($1 trillion) is currently being deposited with the ECB eachday.

The deposit rate has steered market borrowing costs since theECB started to provide banks with unlimited liquidity after thecollapse of Lehman Brothers Holdings Inc. in 2008. That policyremoved the need for banks to lend to each other to meet theirreserve requirements, pushing down interest rates. Today's move maytherefore lower the euro overnight index average, or Eonia, whichstood at 0.33 percent yesterday.

“Cutting the deposit rate reduces bank lending rates, andindirectly it helps the economy,” said Martin Van Vliet, senioreuro-area economist at ING Bank in Amsterdam. “It's not a silverbullet, but everything helps.”

Cutting the benchmark rate will lower the cost of ECB loans. TheECB has lent banks more than 1 trillion euros for three years inits so-called Longer Term Refinancing Operations, with the interestdetermined by the average of the benchmark rate over the period ofthe loans.

Draghi last month questioned the effectiveness of cutting rates,arguing that “price signals” have a “relatively limited immediateeffect” amid financial-market tensions. Euro-area economic datahave deteriorated since then.

Unemployment rose to a record 11.1 percent in May, economicconfidence slumped to the lowest in more than two and a half yearsin June, and data yesterday confirmed that services andmanufacturing output contracted for a fifth month. The euro economywill shrink 0.3 percent this year, according to the EuropeanCommission.

“It does look like it is going to be a somewhat rocky 2012 forthe euro-area economy,” said Richard Barwell, senior Europeaneconomist at Royal Bank of Scotland Group Plc in London. “At thesame time, I don't think the ECB are convinced that conventionalpolicy has that much of an impact.”

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