We’re ready to cut interest rates again, says ECB

The euro hit session lows against the dollar and the yen after Draghi said in Rome the ECB would monitor incoming data closely and would be ready to cut rates further, including the deposit rate currently at zero.

“We stand ready to act again,” Draghi said.

The ECB cut its main interest rate to 0.5 per cent last week after eurozone inflation fell sharply in April and unemployment hit a record high in March. It signalled then that it was ready to do more should the eurozone economy deteriorate further.

ECB Executive Board member Benoit Coeure said as much on Saturday.

Another cut could drive the deposit rate below its current level of zero.

The ECB would then charge banks for holding their funds overnight, a step the ECB said it was technically ready for, but which could have major implications on funding markets.

“There are many complications and consequences to take into account that need to be studied carefully and the council has decided to study them, to analyse these consequences in order to be able to act if necessary,” Draghi said, referring to negative deposit rates.

“We will also look at all the data on the eurozone economy in the coming weeks and if necessary we stand ready to act again,” he said, referring to last week’s rate cut, which the council did not agree unanimously.

Highlighting the opposition Draghi may face from some ECB policymakers to a further reduction, board member Yves Mersch, a hawk close to Germany’s Bundesbank, said there could be limits to the effectiveness of instruments such as interest rate cuts.

Data released yesterday pointed to darkening growth prospects.

The first reading of the eurozone’s first quarter economic performance is due next Wednesday, and economists polled by Reuters estimate output fell 0.2 per cent.

Yesterday, European purchasing managers indexes (PMIs) suggested the eurozone’s downturn dragged on in the current quarter, with Germany now suffering a contraction in business activity that has long dogged France, Italy and Spain.

Speaking in Italy, whose new Prime Minister Enrico Letta has been calling for an EU policy switch to focus more on growth and less on austerity, Draghi said high debt countries in particular must not reverse course while trying to stimulate growth.

Meanwhile, the US dollar rose against the yen and euro yesterday and US stocks hovered near last week’s record highs as a brighter outlook for the US economy kept the risk trade alive.

Many analysts have expected a pullback in US equities for weeks now, which Wall Street has largely avoided as traders use weakness as an opportunity to add to long positions.

Wall Street stocks traded slightly higher after the S&P 500 and Dow industrials hit record levels on Friday in the wake of a strong payrolls report.