ECB rate cut underpins sovereign debt markets

Spain’s risk premium on Thursday was at levels last seen close to two years ago after the European Central Bank (ECB) confirmed market expectations by cutting its key intervention rate by 25 basis points to a record low of 0.50 percent.

The ECB said there was scope to ease monetary policy as inflation remained subdued due to the euro zone slipping into recession.

The spread between the yield on the Spanish benchmark 10-year government bond and the German equivalent dropped six basis points to 287 basis points, levels last seen in August 2011. The 10-year bond yield dipped below 4 percent.

“Inflation expectations for the euro area continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2 percent over the medium term,” ECB President Mario Draghi said in a statement after announcing the rate cut.

“At the same time, weak economic sentiment has extended into spring of this year. The cut in interest rates should contribute to support prospects for a recovery later in the year,” Draghi said. “Our monetary policy stance will remain accommodative for as long as needed,” the statement added.

On the stock market, the blue-chip Ibex 35 index closed down 0.15 percent at 8,406.40 points, well off an intraday low of 8,286.60 points. Share prices had previously risen in anticipation of the rate cut, prompting some profit-taking on confirmation of the move.

The ECB easing is unlikely to improve the strained pocketbooks of Spaniards as the interbank market had also already factored in the cut. The 12-month Euribor rate, the benchmark for setting mortgage payments in Spain, had already fallen to 0.528 in April. Lower rates have also failed to get credit moving again as banks continue to focus on deleveraging and shoring up their balance sheets.