ECB Cuts Interest Rates By 0.5%

The European Central Bank today cut interest rates by 0.5% to 2% after the eurozone stagnated at the beginning of the year.

According to the EU statistics office, gross domestic product (GDP) was flat in the 12-member eurozone in the first three months of this year, compared to the previous quarter.

Separately, the European commission said that a model that forecasts eurozone GDP predicted quarterly change of between 0% and 0.4% in the second and third quarters. The first quarter was the eurozone's worst quarterly economic performance since the last three months of 2001.

The ECB, particularly, its president, Wim Duisenberg, have been criticised for failing to act more aggressively to boost growth in the stagnant eurozone, and many analysts predicted that the ECB would belatedly act decisively at today's meeting.

At a speech in Berlin earlier this week, Mr Duisenberg hinted that he would not disappoint the markets, after remarks from top ECB officials on the dampening effects on inflation of a surge in the euro against the dollar.

"Not least due to the appreciation of the euro, inflationary pressures have declined significantly over recent months. This assessment will be reflected in our deliberations on monetary policy," Mr Duisenberg had said.

In the past the ECB has insisted that current interest rates are already at historic lows and that monetary policy was not a block on growth. It argued that labour and product market reforms played a more important role.

The HSBC said in a briefing note: "It's a shame it wasn't sooner and a shame it wasn't bigger, but at least the ECB has cut ... In our view, there is a significant risk that the move has come too late to prevent a mild recession in the eurozone. Germany is also set to move into deflation, possibly as early as next year. Against this background, we very much doubt that the this cut is the last."