The European Central Bank (ECB) yesterday slashed its main interest rate from 1.25% to a record low of 1%.
It is the seventh time the ECB has lowered its key rate since October 2008 when it stood at 4.25%.
ECB president Jean-Claude Trichet said the ECB had also agreed unanimously to pump €60bn into the eurozone as |officials step up their response to the worst recession since World War II.
It is hoped that the decision will encourage banks to maintain and expand their lending to customers and to ease funding conditions for banks and enterprises.
Trichet said: “The Governing Council has decided in principle that the eurosystem will purchase euro-denominated covered bonds issued in the euro area.”
Although Mr Trichet was unclear on how the bond |purchases would be funded, analysts have said that the move could enable ‘quantitative easing’, which has the same effect as printing money.
Taoiseach Brian Cowen has welcomed the development. He said: “Obviously, we'll have to wait and see what the details are but they are indicating that they will give more access to credit and that will be helpful in our situation.”
Goldman sachs group economist Natacha Valla, who used to work for the ECB, said that “the ECB surprised in a good way”. She added “€60bn is not insignificant. It’s more than symbolic”.
The ECB's plans bolstered the euro, which rose yesterday to a one-month high against the dollar of $1.34 and follows news that the Bank of England will keep interest rates unchanged at 0.5%
Unlike the US and the UK, the ECB is unable to buy European government debt because it would have implications for the deficits of individual countries and go against the ECB constitution.