European Central Bank President Mario Draghi said policy makers discussed cutting interest rates to a record low today, fueling expectations they will act as soon as next month as the worsening debt crisis curbs economic growth.

“We monitor all developments closely and we stand ready to act,” Draghi told reporters in Frankfurt after the ECB left its benchmark rate at 1 percent. Downside risks to the economic outlook have increased and “a few” of the ECB's Governing Council members called for rate cut at today's meeting, he said.

The ECB is under pressure to lower rates and introduce more liquidity support for banks as governments struggle to fix a crisis that's engulfing Spain and could force Greece out of the euro. While the ECB extended into next year its policy of lending banks as much money as they want for periods of up to three months, Draghi indicated another round of three-year loans is not imminent, keeping the pressure on governments to step up their response to the crisis.

“I don't think it would be right for the ECB to fill other institutions' lack of action,” he said.

The euro fell as Draghi spoke before recouping its losses to trade at $1.2513 at 5:25 p.m. in Frankfurt, up 0.5 percent today. The yield on Spain's 10-year government bond climbed as much as 6 basis points before slipping back to 6.38 percent.

“Draghi left the door wide open for a rate cut,” said Tobias Blattner, an economist at Daiwa Capital Markets Europe in London. “But policy makers wanted to keep their powder dry until after the Greek elections and the independent assessment of the Spanish banking sector.”

Greece will hold fresh elections on June 17 that could hand more power to parties opposed to the terms of the nation's rescue package and precipitate its exit from the monetary union. Spanish Economy Minister Luis de Guindos said today that reports on banks' loan books by two international consultants will be ready in 10 to 15 days.

The Group of Seven nations yesterday agreed to coordinate their response to Europe's turmoil, which has tipped at least eight of the 17 euro-area economies into recession and is threatening the global economy.

New Forecasts

The ECB today forecast a 0.1 percent economic contraction in the euro area this year, unchanged from a March estimate, while it lowered its prediction for 2013 growth to 1 percent from 1.1 percent. Inflation forecasts were unchanged at 2.4 percent for 2012 and 1.6 percent for 2013.

Draghi said the projections were finalized before a spate of “soft” economic data. German industrial output fell more than economists forecast in April and Spanish production had the biggest drop in more than two years, two reports showed today.

Euro-area unemployment has reached 11 percent, the highest level on record, and purchasing manager indexes show manufacturing and service industries are contracting at a faster pace than they were when the ECB last cut rates in December.

International Monetary Fund Managing Director Christine Lagarde said in an interview with Sweden's Svenska Dagbladet published June 4 that it's “clear” the ECB has room for another rate cut.

At the same time, Draghi said stresses in financial markets are “far away” from the levels reached after the collapse of Lehman Brothers Holdings Inc. in 2008.

“We still look for a 25 basis point ECB rate cut in July,” Holger Schmieding, chief economist at Berenberg Bank in London, said in an e-mail. However, “the ECB offered no hint today that it may re-activate its two most important non-standard measures, that is the three-year long-term refinancing operations and the purchases of sovereign bonds,” he said.

Spain, which has resisted pressure to become the fourth euro-area nation to seek a bailout, yesterday called for the first time for European funds to shore up its banks as it struggles to recapitalize them.

The spread between Spanish and German 10-year bond yields widened to a record 5.4 percentage points last week and the cost of insuring against default on Spanish sovereign debt rose to a historic high.

With his comments today, Draghi is “delineating the role of the ECB from that of governments, as he seeks to get leaders to agree on a road map” to shore up the euro, said Julian Callow, chief European economist at Barclays Plc in London.

European leaders are due to hold a summit in Brussels on June 28-29.

The Reserve Bank of Australia cited Europe's crisis when cutting its benchmark rate yesterday by a quarter point to 3.5 percent, while the Bank of Canada held its key rate at 1 percent. The Bank of England will announce its latest policy decision tomorrow amid speculation it could increase asset purchases after the U.K. slipped back into recession.

Bloomberg News

Instant Insights /

Draghi Says ECB Stands Ready to Act

Related Stories

Recommended For You