Eurozone Monetary Policy


Eurozone: ECB cuts rates and opens door to further action in the coming months

May 2, 2013

At its policy meeting on 2 May, the European Central Bank (ECB) cut the refinancing rate by 25 basis points to 0.50%. The decision, which matched market expectations, represents the first rate cut since July 2012 and brings the refinancing rate to a new record low. In addition, while the ECB cut the lending rate from 1.50% to 1.00%, it left the deposit rate unchanged at 0.00%, as monetary authorities are still pondering the "unintended consequences" of a negative rate on marginal deposits. At the same time, the ECB announced that it will conduct its refinancing operations as "fixed tender procedures with full allotment" at least by mid-2014, thus allowing lenders across the region to access ECB liquidity with no limits in exchange for appropriate collateral.

The rationale for the interest rate cut was provided by a deteriorating growth outlook for the European economy. According to the ECB, "recent developments in short-term indicators, notably survey data, indicate that weak economic sentiment has extended into spring of this year". Moreover, while economic activity will gradually recover over the second half of 2013, the risks to the economic outlook remain mostly on the downside. Meanwhile, inflationary pressures will remain subdued going forward as "underlying price trends should persist and, over the medium term, inflation expectations remain firmly anchored in line with price stability". According to ECB President Mario Draghi, the rate cut will support the recovery expected in the second part of 2013. Moreover, the ECB policy stance will remain accommodative "for as long as needed". Against this backdrop, FocusEconomics panellists expect the policy rate to end 2013 at 0.52% and 2014 at 0.61%.

Finally, as already hinted in the previous month's statement, the ECB confirmed that it is looking into non-standard policy measures, in particular to address the lack of credit for small and medium enterprises (SMEs). In this respect, Draghi announced that the ECB is working closely with other European institutions and in particular with the European Investment Bank (EIB), on a plan to create a functioning market for asset-backed securities in order to provide liquidity to SMEs. However, Draghi did not provide details on specific measures as the ECB planning is still at a very early stage.

Author:, Head of Data Solutions

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