ECB Cuts Interest Rates Ahead of EU Summit

The European Central Bank cut interest rates for a second straight month in a policy meeting today, and may take additional measures to stimulate bank lending and fight off a recession.

ECB policymakers meeting Frankfurt today lowered the benchmark interest rate by 25 basis points to 1 percent, matching a record low. They may also loosen collateral criteria to give banks greater access to cheap cash, said three euro-area officials with knowledge of deliberations, and might also offer longer-term loans than are currently available.

��They will have listened to the banks and will start some measures to alleviate some of the strains in markets,�� said Christoph Rieger, head of fixed income strategy at Commerzbank AG in Frankfurt. ��They will also keep open the option to go below 1 percent on rates, that��s no longer the magic floor.��

The ECB is focusing on getting banks lending again rather than increasing its purchases of government bonds, instead leaving it up to euro leaders to frame a “comprehensive” solution to the debt crisis. Later today, Europe’s leaders will meet in Brussels to frame the fifth “comprehensive” solution in 19 months.

ECB President Mario Draghi will hold a press conference at 2:30 p.m in Frankfurt. Investors will be looking for signs that the ECB would be willing to step up its bond purchases to cap government borrowing costs if leaders agree on a concrete plan and timeline to stamp out the debt crisis.

Draghi said on December 1 that the ECB��s bond buying ��can only be limited.�� However, he added that, if governments move toward a ��fiscal compact,�� there may be room for ��other elements,�� without elaborating.

For now, the ECB will likely focus on addressing signs of a credit squeeze, which falls squarely within its remit. The central bank has ��observed serious credit tightening�� and is ��aware of the continuing difficulties for banks, due to the stress on sovereign bonds, the tightness of funding markets and ! scarcity of eligible collateral in some financial segments,�� Draghi said on December 1

The ECB is already lending banks as much money as they want against eligible collateral for periods of up to a year, and will likely add two-years loans to its arsenal today.