ECB Surprises and sideswipes market with Rate Cut

The European Central Bank unexpectedly cut interest rates as Italian and Spanish borrowing costs soared after euro-area leaders raised the prospect of Greece exiting the monetary union.

ECB officials, meeting under the presidency of Mario Draghi for the first time, cut the benchmark interest rate by 25 basis points to 1.25 percent, wrong-footing 51 of 55 economists in a Bloomberg News survey. Four predicted a quarter-point move and two expected a half-point cut.

European leaders last night raised the prospect of the 17- member area splintering, with France and Germany saying they would treat Greece’s surprise referendum on a second bailout as a vote on its euro membership. With the region’s economic slowdown deepening and investors growing increasingly concerned, the ECB was under pressure to reverse this year’s two rate increases.

“The economy is weakening, possibly even already shrinking,” said Silvio Peruzzo, an economist at Royal Bank of Scotland Plc in London, who predicted a 25 basis-point cut today. “It’s about survival for the euro zone, certainly for some countries. The support of the ECB is very important.”

Bloomberg

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