European Central Bank cuts key rate to 1 per cent; BoE boosts liquidity

The European Central Bank (ECB) has cut its benchmark interest rate by 25 basis points to a new record low of 1.0 per cent effective 13 May, even as the Bank of England left its key rate unchanged at 0.5 per cent and increased its bond-purchase programme.

''The interest rate on the main refinancing operations of the Eurosystem will be decreased by 25 basis points to 1.00 per cent, starting from the operation to be settled on 13 May 2009,'' the ECB said in a release issued after a meeting of the governing council in Frankfurt.

The interest rate on the marginal lending facility will be decreased by 50 basis points to 1.75 per cent from 2.25 per cent while ECB said the interest rate on the deposit facility for banks will remain unchanged at 0.25 per cent.

The gap between ECB's lending and overnight deposit rates have now narrowed to 0.75 per cent. Euro zone inflation rate has also come down with the shrinking of the economy.

The International Monetary Fund (IMF) expects the 16-nation Eurozone economy to shrink 4.2 per cent this year - more than the expected 2.8 per cent decline in the US and 4.1 per cent fall in the UK.

Banks' lending to companies and consumers in the UK dropped for a second straight month in March even as inflation rate dropped to 0.6 per cent. Inflation in the country is projected to fall further over the next 12 months.

The interest rate on the main refinancing operations (MRO) is used to provide the bulk of liquidity to the banking system while the rate on the deposit facility is used to compensate banks for limiting liquidity flows to the system.

The rate on the marginal lending facility offers overnight credit to banks from the Eurosystem in an emergency.

The euro rose more than half a cent to $1.3377 after the ECB announced the rate-cut.

With interest rates near zero levels across Japan, the US and much of Europe, Bank of Japan, the Federal Reserve and the Bank of England are pumping money to reflate their economies.

ECB president Jean-Claude Trichet is expected to announce further policy measures at a news conference later in the day.