European Central Bank cuts rates, will pump up euros

The European Central Bank cut its main interest rates and took other major steps Thursday designed to ease the availability of credit and boost the 16-nation euro zone economy.

ECB said it has decided to buy covered bonds issued by companies in the euro zone, and lend banks unlimited funds for up to 12 months, pulling out all the stops to boost the economy.

Both the Fed and the Bank of England have already embarked on a policy of expanding the money supply by buying securities from banks, known as quantitative easing. So has the Swiss National Bank.

European Central Bank President Jean-Claude Trichet told a press conference, "The Governing Council decided today to proceed with its enhanced credit support approach.

"We will conduct liquidity-providing, longer-term refinancing operations with a maturity of 12 months," he said. The first, to be announced June 23, would be at the prevailing main refi rate, which the ECB earlier cut by 25 basis points to a new record low of 1.0%.

Banks will be able to borrow all the cash they want at a fixed rate. Until now, refinancing operations were up to six months only.

"The Governing Council has decided in principle that the Eurosystem will purchase euro-denominated covered bonds issued in the euro area," he added. Details will be announced after the ECB meeting June 4.

"These decisions have been taken to promote the ongoing decline in money market term rates, to encourage banks to maintain and expand their lending to clients, to help to improve market liquidity in important segments of the private debt security market, and to ease funding conditions for banks and enterprises," he said.

"We will display in our communication of our next meeting all the technicalities that goes with this purchase of covered bonds, which is something that is highly technical.

"I would say at this stage we expect to engage in a program which could be around 60 billion euros."

Money market rates have hit record lows in recent weeks in response to the ECB's generous liquidity provision and interest rate cuts but lending growth to firms and households is still slowing.

Earlier Thursday, the ECB cut its interest rate on its marginal lending facility — used to lend money to banks overnight — by a half a point to 1.75% from 2.25%.

It was the fourth time this year that the Frankfurt-based bank — which sets monetary policy for countries that share the euro — lowered rates, coming on top of cuts in January, March and April.

The bank's last quarter point cut to 1.25% in April however left markets feeling let down, as a deeper reduction to help the economy back to growth had been expected.

Elsewhere, the Bank of England left its benchmark rate unchanged at 0.5% but said it would increase its effort to expand the supply of money in the economy. Iceland's central bank cut official interest rates by 2.5 percentage points to 13% to help the country's collapsed economy Thursday, the third cut this year by the Sedlabanki.

The Czech Republic's central bank cuts its rate by a quarter percentage point to 1.5%, its lowest level since the country was formed after the split of former Czechoslovakia in 1993. The anticipated move, announced Thursday, followed a half percentage point cut in February.

The export-oriented Czech economy has been hit hard as its major trading partners, including Europe's biggest economy, Germany, face deep recession.

The U.S. Federal Reserve and the Bank of England have taken their benchmark interest rates nearly as low as they will go — the Fed funds rate is in a range between zero and 0.25%.