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November 02, 2011

European Central Bank Cuts Key Interest Rate

Under new president Mario Draghi, The European Central Bank unexpectedly cut its key interest rate Thursday.

Draghi, an Italian banker nicknamed "Super Mario," surprised financial markets by cutting the bank's lending rate by a quarter percentage point to 1.25 percent just two days after becoming the bank's chief.

He said the rate cut was necessary because there are "intensified downside risks" for Europe's economy in the coming months, and financial markets are in turmoil over the continent's continuing debt crisis in Greece and other countries.

He said "ongoing tensions" caused by the possibility of a Greek default and exit from the bloc of 17 nations that use the euro is "likely to dampen" Europe's economic growth the rest of this year and into next. The Organization for Economic Cooperation and Development earlier this week predicted the eurozone's economy would only grow by three-tenths of one percent next year.

The bank had twice increased its lending rate this year to reach 1.5 percent, an effort aimed at keeping inflation in check. Inflation in Europe has hit an annual 3-percent rate, well above the bank's 2-percent goal. Draghi said inflation is likely to remain elevated "for some months to come," but would decline to below 2 percent during the course of 2012.