FRANKFURT, Germany - The European Central Bank cut its key interest rate to a record low 0.50 percent Thursday and announced other measures to spur lending and help lift the eurozone out of a stubborn recession.
The bank also extended its offer of unlimited, cheap loans to banks at least through July 2014. The central bank had planned to end the program as soon as this July.
The central bank lowered its benchmark refinancing rate from 0.75 percent, as expected, at a meeting of its rate-setting council in Bratislava, Slovakia.
European Central Bank President Mario Draghi said the bank was prepared to flex its muscles further in the face of high and rising unemployment and growing evidence that Europe’s economy is getting weaker. He said the central bank stood “ready to act if needed.”
Eager to jolt banks into lending more freely, Draghi said the central bank would even consider charging banks to deposit funds. Since 2008, the central bank has reduced the interest rate it pays to banks on deposits from 3.25 percent to zero, creating an incentive for lending.
The measures appeared to recognize that, despite record-low interest rates, European banks still remain cautious about lending to consumers and businesses, while some companies don’t want to risk borrowing in a slow economy.
Draghi also delivered a warning to Europe’s political leaders: Extraordinary actions by the central bank will not be enough to heal the region’s economy. Governments need to accelerate efforts to cut excessive regulations and make Europe a more hospitable place for business.
The economy of the 17 European Union countries that use the euro certainly needs help: The European Central Bank said the eurozone will shrink 0.5 percent for all of this year, and unemployment is at 12.1 percent.
Also, regional auto sales slumped in the first quarter, hitting first-quarter profits at car makers such as Daimler AG, Volkswagen and BMW.
BMW said Thursday that “we do not expect to receive a great deal of impetus from most European markets over the next few months.”
Many economists say clogged lending to small companies meant Thursday’s cut will not do much good. Marie Diron, senior adviser to Ernst& Young, said her assessment was “slight disappointment that the ECB has done the bare minimum.”
At this point, how low rates can go is “a relatively technical point” compared with the bigger issue of getting low rates transmitted to companies, she said.
Draghi had only a sketchy proposal Thursday of how to solve the problem, saying that central bank officials were working with the European Union’s executive commission and the European Investment Bank lending agency on a strategy to ease lending beyond lower rates. The idea under discussion was to create a market for securities, where loans to businesses would be bundled together and sold to investors, a step that could free up more money for loans.
Market reaction to the central bank’s decision was muted as the interest-rate cut had already been priced in by investors.
However, the euro tumbled against the dollar, down almost 1 percent to $1.306, after Draghi said he would not rule out taking the rate the bank offers lenders for deposits to below zero.
Most economists had expected a cut after recent economic indicators gave signs that the central bank’s prediction for a recovery by year-end might not be coming true.
Draghi stuck with that prediction but said there were risks that “could dampen confidence and delay the recovery.”
He also warned that governments could derail the recovery if they failed to take steps to right their finances and make their economies more business-friendly, such as by cutting excessive regulation on hiring and firing.
Governments also need to push troubled banks to strengthen their finances, he said.
“The ECB cannot supplant governments for the lack of structural reforms,” Draghi said, and “cannot clean banks’ balance sheets.”
Business, Pages 29 on 05/03/2013