Friday, 4 November 2011

European Central Bank Cuts Interest Rates as Contagion Fears Grow

THE GUARDIAN: New chief, Mario Draghi, acts after he warning that growth forecasts are likely to be cut and eurozone heading for recession

Financial markets received a jolt of energy when the European Central Bank stunned investors by cutting interest rates – the latest sign that policymakers fear the eurozone crisis could tip economies back into recession.

After chairing his first meeting to discuss interest rates, Mario Draghi, the new ECB president, warned that growth forecasts for the eurozone in 2012 were likely to be cut and that the euro area was heading towards a "mild recession" by the end of this year.

The admission for the first time that Greece might leave the euro caused early gyrations in markets across Europe. But the reversal of the ECB rate rises implemented earlier in the year, when inflation was a cause of concern, bolstered sentiment. In London, the FTSE 100 ended 1.1% higher while in France markets rose 2.7% and in Germany they added 2.8%.

But as he announced the rate cut to 1.25% from 1.5%, Draghi warned that the euro area was facing an "environment of high uncertainty".

And he conceded the current market turbulence is "likely to dampen the pace of economic growth in the second half of the year and beyond." » | David Gow in Athens and Jull Treanor | Thursday, November 03, 2011