Draghi Says ECB Ready to Cut Interest Rates Again If Needed

European Central Bank President Mario Draghi said policy makers are ready to cut interest rates again if needed after reducing them to a record low last week.

“We will be looking at all the data that arrives from the euro-area economy in the coming weeks and if necessary, we are ready to act again,” Draghi said in a speech in Rome today. “Monetary policy will remain accommodative.”

The euro fell half a cent on the comment to $1.3057 and European stocks pared losses. The Frankfurt-based ECB on May 2 cut its benchmark rate by a quarter point to 0.5 percent, and Draghi said then that officials have an “open mind” about taking the deposit rate, currently at zero, into negative territory.

“The Governing Council has decided for the first time to look openly at the possibility of reducing the interest rate on the deposit facility to less than zero,” he said today. “There are many complications. There are many consequences that we must take into account and study closely. The Governing Council has decided to analyze these consequences in order to be ready to act if needed.”

Draghi said last week’s decision was supported by the fact that “macro-economic weakness has spread to parts of euro area where so far the transmission of monetary policy has never been questioned.”

ECB Measures

To help ensure its low rates are reaching the parts of the economy that need them, the ECB announced last week that it will continue to provide banks with as much liquidity as they want until at least mid-2014, and that it is working with European institutions to encourage lending.

The ECB’s measures to date “helped to overcome much of the fragmentation that characterized the funding of the banking system until mid-2012,” Draghi said.

Still, the creation of a single bank supervisor and a common resolution framework “are the most effective initiatives to break the link between bank and sovereign debt that is the basis of the current fragmentation,” he said.

Draghi also said that “to mitigate the inevitable recessionary effects of fiscal consolidation, the composition of such measures must favor the reduction of current public spending and of taxes, particularly in a context such as in Europe where taxation is already high by international standards.”

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