ECB cuts rates to record 1.5%, mulls radical action

By Ambrose Evans-Pritchard, The Telegraph

The European Central Bank has cut interest rates a half point to an historic low of 1.5 percent and opened the door for extreme measures akin to the quantitative easing(QE) under way in America, Britain, and Japan.

“I don’t exclude anything,” said Jean-Claude Trichet, the ECB’s president. “We did not decide that this is the lowest level. We are studying additional non-standard measures.” Bond yields plummeted across the eurozone as the markets instantly priced in further monetary loosening.

None of the eurozone’s 16 central banks have ever seen interest rates this low. The cut follows a collapse in industrial production over the last five months. The pace of deterioration has been faster than the early 1930s, when falls were mostly stretched over a longer period.

The ECB has torn up its growth forecast for this year and expects an unprecedented contraction 2.7 percent for the eurozone. Even this may prove optimistic. Output fell 1.5 percent in the fourth quarter and the picture seems to be going from bad to worse. Export orders for German engineering companies fell 47 percent in January.

Julian Callow from Barclays Capital said the ECB had responded too slowly over recent months as credit tightened. Rates should be “minus 1 percent” under a “Taylor Rule” analysis of economic conditions, suggesting the bank is still far behind the curve. “They need to move urgently. The euro area is besieged by sharply rising unemployment. This is going to a scourge over coming years, with the jobless rating rising to a postwar high of 11 percent,” he said.

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