European Central Bank President Mario Draghi opened a new frontin the battle against the debt crisis after cutting the benchmarkinterest rate to a record low today.

Speaking in Bratislava, Draghi signalled that officials may takethe unprecedented step of charging banks to park excess cash withthe ECB overnight and that another reduction in the main rate ispossible.

“We will look at all the incoming data and stand ready to act ifneeded,” Draghi said at a press conference in the Slovakian capitalafter the ECB cut its key rate by a quarter point to 0.5 percent.Asked if further action could include taking the deposit ratenegative from its current level of zero, he said: “We will look atthis with an open mind.”

The euro fell on the prospect of a negative deposit rate, whichwould amount to the ECB venturing into territory few others havedared to tread. With the 17-nation economy mired in recession andrisks to the outlook “on the downside,” Draghi is ramping up hisresponse.

“At last, the fastest contracting region in the world no longerhas the highest central bank policy rate of all major developedeconomies,” said Chris Williamson, chief economist at Markit inLondon.

Draghi said the ECB will continue to lend banks as much money asthey require at least until mid-2014, extending the policy by morethan a year. Previously, the ECB announced six-month extensions. Ithas also started to consult with European institutions on ways toimprove the flow of credit to companies using collateralizedloans.

“All the options are still very open here, our thinking is verymuch in a preliminary stage given the complexity of the issue,”Draghi said. Still, “to ensure adequate transmission of monetarypolicy, it is essential that the fragmentation of euro-area creditmarkets continue to decline further.”

The euro dropped after his remarks, falling as low as $1.3075from $1.3192 at the start of the press conference.

A negative deposit rate may discourage banks from parking excessliquidity with the ECB overnight, potentially prompting them tolend the cash instead. On the other hand, it could hurt banks'profitability by lowering money-market rates, possibly hamperingcredit supply to companies and households and reducing banks'incentive to lend to other financial institutions.

'Unintended Consequences'

Denmark is currently the only country in Europe with a negativedeposit rate.

Draghi said while there are “unintended consequences” from usingthis tool, the ECB is “technically ready” and would “address theseconsequences if we decide to act.”

The ECB narrowed the so-called rate corridor around itsbenchmark today by leaving the deposit rate at zero and reducingthe marginal lending rate to 1 percent from 1.5 percent.

Taking the benchmark any lower would invite a cut in the depositrate in order to maintain that corridor. Draghi indicated that someofficials wanted to reduce the main rate by 50 basis pointstoday.

“He not only kept the door for a further refi cut open andimplied that some members had argued for a 50 basis-point cut, healso revealed an open mind about a deposit rate cut,” saidChristoph Rieger, head of fixed-rate strategy and Commerzbank AG inFrankfurt. “Irrespective of whether this cut materializes or not,this statement should keep rate speculation more underpinned.”

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