ECB Unexpectedly Cuts Rates as Risk of Greek Euro Exit Grows
Nov. 3 (Bloomberg) -- The European Central Bank unexpectedly cut interest rates at President Mario Draghi's first meeting in charge after euro-area leaders raised the prospect of Greece exiting the monetary union, sending bond yields soaring in Italy and Spain.
ECB officials lowered the benchmark interest rate by 25 basis points to 1.25 percent, confounding 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point reduction.
"Super Mario jumps ahead of the curve," said Carsten Brzeski, senior economist at ING Group in Brussels. "What a starter. Now the big question for the press conference is whether the ECB is also willing to do everything to prevent a further escalation of the sovereign-debt crisis."
Draghi holds a press briefing at 2:30 p.m. in Frankfurt to explain today's decision. He is also under pressure to increase the central bank's commitment to buying the bonds of distressed euro states.
European leaders last night raised the prospect of the 17- member area splintering, with France and Germany saying they would treat Greece's surprise referendum on a second bailout as a vote on its euro membership. With the region's economic slowdown deepening and investors growing increasingly concerned, the ECB was under pressure to reverse this year's two rate increases.
The euro fell almost a cent on the ECB rate cut to $1.3732 and yields on Italian and Spanish bonds retreated.
Italian Yields
Italian bond yields had surged to euro-era records earlier today on concern the debt crisis will engulf other highly- indebted nations in the 17-nation currency bloc.
Italy's 10-year yield jumped to as high as 6.39 percent, a euro-era record, widening the spread over benchmark German bunds to 462 basis points. The yield retreated to 6.14 percent after the ECB's decision.
"It's a bold move by Draghi," said Howard Archer, chief European economist at IHS Global Insight in London, who predicted a quarter-point cut. "He's not going to be afraid of making bold moves, which is what's needed in the current environment."
Irish Finance Minister Michael Noonan yesterday called on the ECB to step up its bond purchases to lower borrowing costs in countries like Italy and stop the crisis from spreading.
'Wall of Money'
The ECB needs to "go into the market and say 'We have a wall of money here and no matter how much speculation there is, we're going to keep buying Italian bonds or any other euro bonds that are threatened'," he told Dublin-based RTE Radio.
Draghi, 64, has to try to forge consensus on a 23-member Governing Council already split over the ECB's bond purchases, which now amount to 173.5 billion euros ($239.4 billion).
The U.S. Federal Reserve yesterday refrained from taking any additional policy steps while saying there are still "significant downside risks" to the economic outlook.
Recent data indicate the euro region is edging toward a recession.
Unemployment in Germany, Europe's largest economy, unexpectedly rose for the first time in more than two years in October and Europe's manufacturing industry contracted for a third month.
While the current inflation rate of 3 percent is well above the ECB's 2 percent limit, weaker growth and demand may drive down oil prices. The ECB currently forecasts inflation will slow to 1.7 percent in 2012.
The Organization for Economic Cooperation and Development on Oct. 31 lowered its growth forecast for the U.S. and the euro area. The U.S. economy, the world's largest, will expand 1.7 percent this year and 1.8 percent next, the Paris-based OECD said. By contrast, the euro area's will grow 1.6 percent in 2011 and just 0.3 percent in 2012, it said.
To contact the reporters on this story: Gabi Thesing in London at gthesing@bloomberg.net Jeff Black in Frankfurt at jblack25@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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