ECB Cuts Interest Rates Ahead of EU Summit

The European Central Bank cut interest rates for a second straight month in a policy meeting today, and may take additional measures to stimulate bank lending and fight off a recession.

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ECB policymakers meeting Frankfurt today lowered the benchmark interest rate by 25 basis points to 1 percent, matching a record low. They may also loosen collateral criteria to give banks greater access to cheap cash, said three euro-area officials with knowledge of deliberations, and might also offer longer-term loans than are currently available.

“They will have listened to the banks and will start some measures to alleviate some of the strains in markets,” said Christoph Rieger, head of fixed income strategy at Commerzbank AG in Frankfurt. “They will also keep open the option to go below 1 percent on rates, that’s no longer the magic floor.”

The ECB is focusing on getting banks lending again rather than increasing its purchases of government bonds, instead leaving it up to euro leaders to frame a “comprehensive” solution to the debt crisis. Later today, Europe’s leaders will meet in Brussels to frame the fifth “comprehensive” solution in 19 months.

ECB President Mario Draghi will hold a press conference at 2:30 p.m in Frankfurt. Investors will be looking for signs that the ECB would be willing to step up its bond purchases to cap government borrowing costs if leaders agree on a concrete plan and timeline to stamp out the debt crisis.

Draghi said on December 1 that the ECB’s bond buying “can only be limited.” However, he added that, if governments move toward a “fiscal compact,” there may be room for “other elements,” without elaborating.

For now, the ECB will likely focus on addressing signs of a credit squeeze, which falls squarely within its remit. The central bank has “observed serious credit tightening” and is “aware of the continuing difficulties for banks, due to the stress on sovereign bonds, the tightness of funding markets and scarcity of eligible collateral in some financial segments,” Draghi said on December 1

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The ECB is already lending banks as much money as they want against eligible collateral for periods of up to a year, and will likely add two-years loans to its arsenal today.