New ECB chief surprises markets with 25 bps rate cut

The European Central Bank surprised financial markets on Thursday with a 25-basis points cut in interest rates to 1.25 per cent, with its new president, Mario Draghi, hinting that the euro zone could subside into ''a mild recession.''

''What we are observing now is slow growth heading towards a mild recession by year-end,'' said Draghi, addressing his first news conference as president of the ECB. ''A significant downward revision to forecasts and projections for average real GDP growth in 2012 is very likely.''

The ECB chief said while inflation was likely to stay above two per cent for some months, the rates would start declining in 2012. ''After today's decision, inflation should remain in line with price stability over the policy-relevant horizon,'' he added.

Inflation has been hovering at around three per cent in the 17-member euro zone area, well above the ECB's target of below two per cent. The decision to cut rates was taken unanimously by the 23-member governing council of the ECB.

Asked about the controversial bond-buying programme of the ECB, Draghi reiterated it was a temporary move. ''Our securities market programme has three characteristics: it is temporary; it is limited; it is justified in restoring the functioning of monetary transmission channels,'' he said.

But the new ECB chief asserted that the central bank would not be forced to buy bonds. With the Greek crisis threatening to derail many other economies – including those of Italy, Spain and France – the ECB is under pressure to buy bonds of several governments.