EURO DROPS TO 1-MONTH LOW ON OUTLOOK

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Contributor / 2012-07-08 15:19:57

Draghi said today’s cut in interest rates to a record low may have only a limited impact on the euro-area economy as it slides toward recession

The euro slid to the lowest in more than a month versus the dollar after European Central Bank President Mario Draghi said the currency bloc still faces risks after policy makers cut interest rates to a record low. Draghi said today’s cut in interest rates to a record low may have only a limited impact on the euro-area economy as it slides toward recession.

The comments made at a press conference in Frankfurt after lowering the benchmark and deposit rates by 25 basis points to 0.75 percent and zero respectively.

China also lowered rates today and the Bank of England restarted its asset purchases, adding to a new round of global monetary stimulus. With Europe’s debt crisis curbing growth across the continent and damping the outlook for the world economy.

The euro fell more than half a cent to a one-month low and traded at $1.2381 at 4:40 p.m. in Frankfurt. The pound fell for a fourth day against the US Dollar, declining 0.4 percent to $1.5523. It strengthened 0.7 percent to 79.81 pence per euro.

The 17-nation euro economy is heading for recession. Unemployment rose to a record 11.1 percent in May, economic confidence slumped to the lowest in more than 2 1/2 years in June, and data yesterday confirmed that services and manufacturing output contracted for a fifth month. The economy will shrink 0.3 percent this year, according to the European Commission. Cutting the benchmark rate will reduce the cost of ECB loans.

The ECB has lent banks more than 1 trillion Euros for three years in its so-called Longer Term Refinancing Operations, with the interest determined by the average of the benchmark rate over the period of the loans. The deposit-rate move may encourage banks to lend to other institutions, companies or households instead of parking excess cash in the ECB’s overnight deposit facility. About 800 billion Euros is currently being deposited with the ECB each day.

The Bank of England restarted bond purchases two months after halting its expansion of stimulus as the deteriorating outlook spurred policy makers to ramp up efforts to kick start a recovery. The Monetary Policy Committee led by Governor Mervyn King raised its asset-purchase target by 50 billion pounds to 375 billion pounds and said the purchases will take four months to complete.

The Bank of England’s resumption of quantitative easing is a part of a twin-pronged effort that includes a new credit- boosting program by the central bank to pull Britain out of a recession. With inflation easing and reports this week showing that factory, services and construction activity weakened in June, policy makers were spurred to act by continued concerns about the threat from the euro-area debt crisis.

Explaining its decision, the Bank of England said it expects inflation will continue to ease and that without more stimulus, it was ‘‘more likely than not’’ to undershoot the 2 percent target in the medium term. The economy has contracted for the past two quarters and indicators ‘‘point to a continuation of that weakness in the near term, both at home and abroad,’’ it said.

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