The ECB also cut the interest rate on its deposit facility to 0 per cent in a move aimed at encouraging banks to lend their funds in the market to other banks overnight, where they receive a higher interest rate, currently about 0.3 per cent. "The benchmark rate doesn't really matter at the moment, but cutting the deposit rate all the way to zero takes the ECB into new territory," said James Nixon, chief European economist at Société Génerale in London. "If you can kick-start the money market you go a long way to addressing some of the funding problems that banks face. That may free banks to lend to the economy.

what of unintended consequences anyone?

European Central Bank President Mario Draghi kept the door open on Monday to further interest rate cuts, saying any decision on further action would depend on economic data.

The ECB cut its key policy rate to a record low 0.75 percent last week to shore up the euro zone economy which is on the brink of recession, with even powerhouse Germany showing some signs of weakness.

"We have to look at what the situation is, look at the data and the developments and then we'll make up our minds in the Governing Council about what next actions we'll do," Draghi told the European Parliament when asked whether the ECB could continue reducing rates.

Even at 0.75 percent, the ECB's main interest rate is higher than that of any of the other four leading central banks.

FXstreet.com (Barcelona) - Merrill Lynch analysts believe the ECB might cut the rate by another 25bp to 0.50% around the end of Q3 after the dovish assessment in the latest policy meeting, where 25bp were already cut to adjust to the materialized downside risks to the economic activity, dampening global demand and rising energy prices: “We estimate the ECB will cut the main refi rate by another 25bp to 0.50% around the end of 3Q and the marginal lending facility by 25bp to 1.0%, given our projections of a 0.7% contraction in GDP this year and zero growth next year with inflation falling to 1.5% on average in 2013 (and below 2% in 4Q)”, wrote the economists, not expecting the deposit rate to be cut any further, being currently at 0%.

The International Monetary Fund has warned the eurozone's leaders to take "decisive action" as Spanish bond yields shot up to dangerous levels, signalling a fresh leg of the sovereign debt crisis.

In its annual report on the eurozone's policies, known as an Article IV, the IMF made clear that it believes euro ministers have not yet done enough to underpin the future of the single currency.

It called for the European Central Bank to cut interest rates,

It most defn will keep cutting, will it solve the problem

Nope!

In early July, the ECB cut its main refinancing rate to 0.75%, prompting us to expect another 25bp cut in September. More surprisingly, the ECB also cut its deposit facility rate to zero, despite the potentially negative effects on market functioning. Having revealed a willingness to move despite such effects, we now think that the ECB will not shy away from cutting its deposit rate below zero. In terms of timing, we expect both the refi and deposit rate cuts in October, allowing the ECB a bit more time to assess any negative effects of the zero deposit rate before taking it negative.

The benefits of another rate cut
With peripheral banks reliant on ECB funding, the main benefit of cutting the refi rate by another 25bp is to reduce the cost of this funding for peripheral banks by another €2-3 billion over one year. This amount is not huge, but Draghi (surprisingly) cited it as one motivation behind July’s rate cut.

In terms of impacting market rates, cutting the deposit facility is more important. This is because the effective overnight rate (Eonia) is trading closer to the bottom of the ECB’s rate corridor due to the huge amounts of excess liquidity in the system. If the ECB cuts its deposit rate to -0.25%, Eonia would also decline below zero. This would then have the normal effects of a rate cut, e.g. on the term structure and via a weaker currency.

Finally, a negative deposit rate would lead to a ‘search for yield’. E.g. core banks would suddenly have to pay the ECB €2 billion or so per year on their excess reserves. In response, each individual bank may try to get rid of its excess reserves by purchasing positively yielding assets or by making loans. The excess reserves would not decline in aggregate, but they would circulate more quickly, with asset prices getting pushed up in the process. Even the zero deposit rate has had a big impact so far on shorter-term government bonds in France, Belgium, etc. And if Euro area politicians reduce the huge uncertainties facing the periphery, these reserves may even find their way back to the periphery, allowing peripheral banks to finally reduce their reliance on the ECB.

So, I was wrong the last time.

But the ECB the first bank to cut the deposit rate to negative territory? To charge banks for funds they have to have on deposit? I don't think so.

Second. Denmark already there.

That's CDs, though, not interest on reserves?

The Danes have a safe haven problem and a currency band within ERM to maintain. Not sure the euro has an over-valuation problem

COPENHAGEN—Denmark's central bank mirrored the European Central Bank's historic rate cut by taking a rare step of its own: slashing its deposit rate below zero for the first time.

Second. Denmark already there.

The European Central Bank’s decision to cut deposit rates to zero had a “substantial” impact, while the bank needs to “reflect a lot” before deciding to reduce the rate further, ECB executive board member Benoit Coeure said.
Speaking today in Mexico City, Coeure said he sees the global economy moving toward very low or zero growth, stopping short of recession.

Coeure said the ECB needs to find ways to reduce reliance on ratings companies and can build credit rating capacities within its own institutions for some sovereigns. The central bank decided July 5 to cut its benchmark rate to a record low of 0.75 percent as well as cutting the rate it pays on overnight deposits to zero.

The forward euro zone EONIA overnight interest rate for December traded at 6 basis points on Friday, less than the average spread of 8 basis points over the ECB's depo rate seen in the past few months.