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New ECB head unexpectedly cuts key rate to boost economy, signals bond purchases limited
FRANKFURT, Germany (AP) ' Mario Draghi made his debut as head of the European Central Bank with a surprise interest rate cut that aims to boost a eurozone economy that is being hit hard by the turmoil emanating from the Greek debt crisis.
The quarter percentage point cut takes the bank's main interest rate down to 1.25 percent, and is designed to boost confidence in the 17 countries that use the euro and prevent an expected slowdown in the last three months of the year from turning into an outright recession.
But Draghi gave a sharp rebuff to anyone expecting more help from the bank's controversial program to buy government bonds. The point of the purchases, which are intended to keep the Greek crisis from spreading to much bigger euro economies like Spain and Italy, is to drive down the borrowing costs for those countries.
Critics though say it takes the pressure off governments to act responsibly.
He stressed the program remains "temporary" and added that it was "pointless" for governments to rely on the central bank. A far better way to relieve the interest rate pressure is for countries to get their deficits under control and boosting growth, he said.
The rate cut, which comes earlier than expected by many economists rolls back an increase made under predecessor Jean-Claude Trichet only in July.
"It is obvious that the ECB has caught the crisis virus and is trying everything it can to prevent a full-fledged recession," said economist Carsten Brzeski at ING.
Uncertainty from Europe's debt crisis is a factor as business and consumers are reluctant to spend, while investors are worried of the potential for more financial turmoil if Greece defaults on its debts.
At his first post-meeting press conference, Draghi said the current market turbulence is "likely to dampen the pace of economic growth in the second half of the year and beyond."
A slowing economy means, in turn, that inflation would drop next year from its current 3 percent to the bank's goal of less than 2 percent. The bank's main mission is controlling inflation.
Draghi noted there were significant downside risks for growth, and that "some of those risks are materializing."
The cut will shore up confidence at a time when Europe is embroiled in a crisis stemming from Greek Prime Minister George Papandreou's pledge to hold a referendum on the country's latest bailout package.
Though the referendum looks like it's been scrapped, uncertainty over Greece will likely linger.
Fears of a Greek debt default and the country's possible exit from the euro prompted this week's turmoil in the markets.