ECB cuts key rate to new low to help economy

FRANKFURT, Germany — The European Central Bank cut its key interest rate by a quarter percentage point Thursday to a record low 0.75 percent to try to help ease Europe's financial crisis and boost its sagging economy.

The action, which was widely expected, is meant to make it cheaper for businesses and consumers to borrow and spend money.

In a more surprising move, the ECB cut the interest rate it pays banks on overnight deposits by a quarter percentage point — to zero. The goal is for banks to lend the money, rather than sock it away with the ECB.

ECB President Mario Draghi said the eurozone economy would recover only gradually and that risks "continue to be on the downside." He said that some of the risks foreseen from the debt crisis had already materialized, pushing the bank to act.

Analysts warned the rate cuts might do little to jolt the eurozone economy back to life. Borrowing rates are already low, but businesses and households are not spending money because they are afraid of the economic outlook.

Draghi conceded the cut sent a "muted" signal given weak demand for credit. But he said the move was an important signal of encouragement for businesses during a time of uncertainty. "It should make entrepreneurs think that their investment decisions and tradeoffs are now improved," he said.

Stock markets initially rose after the news, but the gains faded as investors worried about a slowdown in the global economy. Germany's DAX stock index fell 0.8 percent and the Dow 0.3 percent. The euro was down 1.1 percent at $1.2380.

Draghi said the ECB was free to cut rates because inflation was expected to fall. The ECB has a strict mandate to fight inflation as its first priority, unlike the U.S. Federal Reserve which can juggle concerns about inflation against the need to make the economy grow and create jobs.

"Today's ECB interest rate cut does little to alter the bleak economic outlook," said Jennifer McKeown, analyst at Capital Economics.

She said the ECB is likely to now wait and see how the financial markets and the economy react to the rate cut and to the new emergency measures announced by European leaders last week.

The leaders agreed to make it easier for troubled countries and banks to receive rescue loans from Europe's bailout fund and also signaled greater willingness to use emergency funds to purchase government bonds. The goal would be to drive down troubled countries' borrowing costs. They also agreed to create a single Europe-wide banking regulator to prevent bank bailouts from wrecking individual countries' government finances.

Collectively, the moves sent a message to financial markets that leaders from the 17 countries that use the euro could work together to fix their problems. They also helped lower the high borrowing costs for financially stressed countries such as Italy and Spain, the euro region's third- and fourth-largest economies.

Lending activity in the eurozone has remained weak because businesses are not asking for credit because of the slow economy and out of fear that the eurozone may suffer a further financial calamity. Concerns remain that bankrupt Greece could eventually leave the euro, causing more turmoil, or that Spain and Italy could need bailouts that would strain the resources of donor countries.

Joerg Kraemer, chief economist at Commerzbank, said the cut wouldn't fix what was wrong. The reason the eurozone economy is weak is not because of "high ECB rates but because of uncertainty stemming from the sovereign debt crisis. This can't be cured by lower rates."