European
Central Bank cuts deposit rate to historic -0.1%, with chief Mario Draghi also
unveiling €400bn of cheap funding
The
European Central Bank unveiled an unprecedented package of measures on Thursday
in a dramatic attempt to inject life into the eurozone's flagging economy and
ward off a damaging deflationary spiral.
In what
marks a historic first for the troubled region, ECB boss Mario Draghi and his
colleagues on the governing council cut the deposit rate for the region's
commercial banks to -0.1% from zero.
The central
bank also cut its main interest rate to a new record low of 0.15% from 0.25%,
and announced a €400bn (£325bn) package of cheap funding for banks on the
condition it is used to lend money to companies outside the financial sector,
and not for mortgages.
Draghi has
come under intense pressure over recent months to make cheaper credit available
to households and businesses to boost growth in the 18-member currency zone.
In the last
quarter, GDP growth stumbled to just 0.2% and only avoided contraction thanks
to a strong performance by the German economy.
The ECB
stopped short of pumping funds directly into the financial system via a
programme of quantitative easing (QE), but Draghi said the bank would
"intensify preparatory work" should it prove necessary, and left the
door open to further stimulus if needed.
"We
think this is a significant package. Are we finished here? The answer is no.
"If
required, we will act swiftly with further monetary policy easing. The
governing council is unanimous in its commitment to using also unconventional
instruments within its mandate should it become necessary to further address
risks of too prolonged a period of low inflation."
The
decision to impose a negative deposit rate on banks was described as a
"bold and unusual move" by Howard Archer, chief European and UK economist
at IHS Global Insight.
Trevor
Greetham, a director at Fidelity Worldwide Investment, said: "Draghi
handsomely beat expectations by adopting all of the measures under discussion
and leaving the door open to future QE by way of asset purchases if they need
to boost growth further or turn sentiment around in a crisis situation."
Action was
widely predicted by analysts and markets amid a mounting threat that
persistently low inflation in the 18-nation eurozone could lead to outright
deflation. But it was unclear what form it would take.
Data
published by the EU's statistics office revealed an unexpected fall in the
annual rate of eurozone inflation to 0.5% in May from 0.7% in April, which
appeared to seal the deal for more ECB stimulus.
With a lack
of inflationary pressure amid a weak economic recovery, the fear is the
eurozone will slide into a destructive deflation trap, where consumers and
businesses delay spending in anticipation of lower prices in the future.
The ECB
also lowered its eurozone inflation forecasts to 2016. Draghi said the annual
rate was expected to stay at low levels in the coming months and would only
rise gradually through 2015 and 2016. Inflation is expected to reach 1.5% by
the final quarter of 2016. However, he played down the threat of deflation.
"We don't see deflation, a self-fulfilling negative spiral."
The euro
fell as investors digested the ECB's gloomier forecasts and the sweeping cuts
in borrowing rates. But the Paris Cac and Frankfurt Dax benefited from the
prospect of higher growth in the eurozone as a result of the policy shift. The
Cac jumped 42 points to 4,543 and the Frankfurt Dax increased by 7.4 points to
9,943.
But some
economists said the measures would prove to be too little, too late.
Marc
Ostwald, an economist at Monument Securities said: "In theory, this should
help, but as has been obvious in the UK, where borrowing by small and
medium-sized enterprises (SMEs) is still quite weak and SME deposits are high,
SMEs' distrust of the financial sector post the credit crisis remains very
high."
Draghi said
the purpose of the June policy meeting was threefold: to ease monetary policy;
enhance the impact of measures on the real economy; and reaffirm a willingness
to use unconventional measures if further easing is needed.
Draghi said
the decision on the package was unanimous among the 24-strong governing
council, which includes the governors of the national central banks of the 18
eurozone countries, signalling "an extraordinarily unusual degree of
consensus". This indicated that Germany's Bundesbank – once unconvinced of
the use of such measures – had backed the latest plan.
The Bank of England, which has already cut borrowing rates for banks and pumped £375bn of QE into the UK economy, announced at the end of its monthly meeting that it would maintain interest rates at 0.5% and the same level of QE.
The Bank of England, which has already cut borrowing rates for banks and pumped £375bn of QE into the UK economy, announced at the end of its monthly meeting that it would maintain interest rates at 0.5% and the same level of QE.
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