European Central Bank Cuts Rates

The European Central Bank (ECB) today cut its benchmark interest rate less than economists forecasted, reducing it by a quarter point to 1.25%, even as the euro-area economy sinks deeper into recession.

The rate for overnight deposits at the ECB was cut to 0.25% from 0.5%.

As rates edge closer to zero, officials are debating the merits of following the Federal Reserve and the Bank of England in buying assets. While Vice President Lucas Papademos says the ECB could purchase corporate debt, council members Juergen Stark and Axel Weber have signaled they're opposed to such a move, suggesting the council is split on the scope of new measures.

"The ECB is merely buying time" with today's quarter- point cut, said Aurelio Maccario, chief euro region economist at UniCredit Group in Milan who correctly forecast the move.

"It also means that it doesn't let the deposit rate drop to zero, which would kill off the interbank lending market. There is a lot of debate in the council over what to do next."

At 1.25 percent the main rate is the lowest since the ECB took charge of monetary policy in 1999.

Today's decision came as leaders from the Group of 20 nations met in London to discuss ways to rescue the global economy. The euro-region economy may shrink as much as 4.1 percent this year, faster than the ECB expects, according to the Organization for Economic Cooperation and Development.

Europe's manufacturing industry contracted more than initially estimated in March and unemployment jumped to a three- year high of 8.5 percent February, reports yesterday showed.

With 70 percent of the euro region's corporate financing coming from banks, the ECB has so far focused on trying to revive interbank lending.

The ECB loans banks unlimited amounts of cash for up to six months and has allowed its deposit rate to steer short-term market borrowing costs.

The ECB "Is a different animal to all the other central banks, but has in fact be quite creative in terms of how it tackled the crisis," said Astrid Schilo, an economist at HSBC Holdings Plc in London said.

Today's smaller-than-forecast reduction may stoke speculation that the ECB hasn't yet reached the end of its cutting cycle.

That in turn could delay the introduction of loans with longer maturities, said BNP Paribas economist Ken Wattret, because banks won't be tempted to borrow long term from the ECB if they think rates are set to fall further.