The ECB has cut interest rates by 25 points to an historic 1%. This was generally anticipated by the market. Apparently, the ECB has also lowered the quality of assets that are required for banks to avail themselves of credit lines. This is necessary to provide additional liquidity into the system, as a consequence of the lock-up that currently prevails in financial markets.
The decision by the ECB to raise interest rates over the past few years, in an apparent attempt to constrain inflation, was always misconceived. See "ECB Caught in Inflation Trap." This was a consequence of the inaccurate method which the central bank used to predict inflation, caused by incorrectly attributing inflation to changes in the supply and demand of goods, rather than money supply. Europe is now paying the price.
The ECB has indicated that it will not participate in any large scale purchase of bonds, in an attempt to constrain yields. This is positive. There is no reason for the central bank to currently embark on such an initiative. If it needs to provide its members with further funding, it should issue its own bonds, which will be priced at a lower rate. The ECB could then afford these members a private facility for a credit line that it may require.
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