Brussels, 10/05/2001 (Agence Europe) - The Governing Council of the European Central Bank (ECB) decided on Tuesday to lower its key rates by 0.25 percentage points. The ECB justified its decision by a fall in inflationary pressure and a slowdown in the growth of the monetary mass. The minimum submission rate applied to main Eurosystem financing operations was thus lowered to 4.50%. The interest rate on the marginal lending facility (floor rate) and that of the deposit facility (ceiling rate) were cut respectively to 5.5% and 3.5%. ECB President Wim Duisenberg declared during a press conference that "on the basis of the information available, this is the appropriate level of interest rates to ensure that the euro area economy will be able to maintain price stability and thereby to contribute to sound economic growth over the coming years".
By using its main monetary tool for the second time in its history (see EUROPE of 10 April 1999, p.8), the ECB tabled on having an impact on markets and on most economists. On Thursday morning, most of them expected that the monetary institution would maintain its status quo because of inflationary risks, one of the main arguments that the ECB recently invoked to resist external pressure to lower its rates. Wim Duisenberg specified that "this reduction is to be seen as an adjustment to the level of interest rates to somewhat lower inflationary pressure over the medium term". On 26 April, he justified keeping rates as they were by inflation of over 2.6% in the euro zone, which was above the 2% ceiling. What has changed? Mr Duisenberg has given several arguments to support his decision: 1) moderate growth of the euro zone economy should contain the pressure on consumer prices; 2) wage moderation has been maintained, despite the oil crisis; 3) the temporary rise in food prices caused mainly by the mad cow crisis and the foot and mouth disease, is among the "extraordinary factors" that should, however, "gradually diminish over the course of this year, implying an improved outlook for inflation to fall below 2% in 2002". Mr Duisenberg concluded that, in order to remain free of inflationary pressure and to maintain growth, governments and social partners must be decisive about implementing structural measures on labour and product markets.
After having shown its independence in the face of internal and external pressures on the European Union, the ECB has come into line with the general trend announced by the US Federal Reserve, the Bank of Japan and the Bank of England, in a context of slowdown in world economic growth and upheavals on the financial markets.
First reactions to the ECB's surprise decision
After the decision by the Frankfurt-based institution, the euro underwent a slight rise which allowed it to reach $0.89 at the beginning of the afternoon, to fall to $0.8815 around 15h00, that is below the rate at 11h00 ($0.8866). On the whole, markets reacted badly to this surprise announcement, at a time when the ECB had affirmed it would wait before taking such action given the inflationary risks.
Eurogroup President Didier Reynders simply noted the ECB's decision. He declared that a "good monetary policy must take into account the commitments taken by the Eurogroup finance ministers concerning structural reforms and budgetary consolidation, the aim still being to obtain the best economic policy possible". He added that the "dialogue of trust between the ECB and the Eurogroup" must continue. Mr Reynders had on several occasions called on the ECB to "assume its responsibilities regarding monetary policy" (see EUROPE of 23/24 April, p.9).