Unexpectedly, the European Central Bank respond to mounting market pressure and speculation of a rate cut this meeting as Mario Draghi has been in charge since November 1, while Trichet ended his 8-year role without changing rates in the past meeting.
The Governing Council voted to cut key interest rates to 1.25% from 1.50% and also cut the marginal lending facility to 2.00% from 2.75%, while the deposit facility became 0.50% from 0.75%, noting that the Bank moved twice this year raised rates by 25 bp in April and in July.
Eyes were focused on the European Central Bank’s coming moves and steps to calm rising debt woes and jitters as growth is worsening further while the debt crisis is deepening, especially after the Greek decision to hold a general referendum on the second bailout deal, which raised more tension in the area that Greece could exit the one-currency union and would be forced into a disorderly default.
European leaders have finally reached a comprehensive plan to overcome the debt crisis and prevent the contagion risks, where leaders attempt to protect other nations within the zone from following Greece’s steps into default; however, the Prime Minister, George Papandreou decided to hold a general referendum and left Greece’s fate in the hands of Greeks, which hindered the implementation of the leaders’ plan and intensified market jitters and fueled uncertainty.
With the start of his term, Mario Draghi was expected to leave rates as they are in the first meeting, especially when the flash CPI annual estimate confirmed that inflation lingered at 3.0% in October; however, the Governing Council saw that it is necessary to cut rates, while the European Central Bank is waiting the effects of the recent stimulus provided in the last meeting, as the bank continued money operations, and offered 12 and 13-month bonds for banks to support recapitalization in addition to offering 40-billion euros of covered bonds.
However, eyes will be focused on the European Central Bank president Mario Draghi in his first press conference, as investors will track any movement from the bank to ensure sufficient liquidity, financial stability and fast recovery, especially after the euro-area unemployment surged to 10.2% while manufacturing and services sectors contracted further this month.
The sentiment deteriorated after the leaders’ final plan failed to quell jitters and rising debt-concerns, especially when the Greek Prime Minister put his nation into a critical situation with a general referendum on the bailout deal, which was opposed by his Finance Minister, where Greece was suspended from the entire financial aid including the sixth installment of last year’s bailout package, as Greece could face bankruptcy as soon as December without any financial aid.
