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| European Central Bank Takes a Radical Step | European Central Bank Takes a Radical Step |
| (35 minutes later) | |
| FRANKFURT — The European Central Bank cut its benchmark interest rate to a record low on Thursday and, in an unprecedented attempt to stimulate the euro zone economy, said it would begin charging interest on deposits held by the bank. | FRANKFURT — The European Central Bank cut its benchmark interest rate to a record low on Thursday and, in an unprecedented attempt to stimulate the euro zone economy, said it would begin charging interest on deposits held by the bank. |
| The so-called negative deposit rate has never been tried on such a large scale and is a bid to push down the value of the euro and encourage banks to invest excess cash rather than hoard it in central bank vaults. | The so-called negative deposit rate has never been tried on such a large scale and is a bid to push down the value of the euro and encourage banks to invest excess cash rather than hoard it in central bank vaults. |
| The European Central Bank cut its benchmark interest rate to 0.15 percent from 0.25 percent, and the deposit rate to minus 0.10 percent from zero. The rate cuts will take effect next week, on June 11. | The European Central Bank cut its benchmark interest rate to 0.15 percent from 0.25 percent, and the deposit rate to minus 0.10 percent from zero. The rate cuts will take effect next week, on June 11. |
| The central bank will also begin offering four-year loans to banks at the benchmark interest rates, under conditions meant to ensure that lenders use the money to issue loans to businesses. For example, the central bank loans will be designed to discourage banks from using the money to buy government bonds. | The central bank will also begin offering four-year loans to banks at the benchmark interest rates, under conditions meant to ensure that lenders use the money to issue loans to businesses. For example, the central bank loans will be designed to discourage banks from using the money to buy government bonds. |
| Mario Draghi, the central bank’s president, said at a news conference that the bank would begin buying packages of loans made to the euro zone private sector, known as asset-backed securities. The measure is designed to push lending to small businesses, but the effect could be limited because the number of securities that qualify is relatively small. | Mario Draghi, the central bank’s president, said at a news conference that the bank would begin buying packages of loans made to the euro zone private sector, known as asset-backed securities. The measure is designed to push lending to small businesses, but the effect could be limited because the number of securities that qualify is relatively small. |
| On news of the measures, the euro declined somewhat against the dollar — which was one of the aims of the central bank’s actions. The weaker currency could help make euro zone exports cheaper, and therefore more competitive, on global markets. | On news of the measures, the euro declined somewhat against the dollar — which was one of the aims of the central bank’s actions. The weaker currency could help make euro zone exports cheaper, and therefore more competitive, on global markets. |
| European stocks were also up broadly after the announcement. | European stocks were also up broadly after the announcement. |
| Mr. Draghi said the moves adopted Thursday had the backing of the entire governing council of the central bank, which voted earlier in the day — support that he called “an extraordinary degree of unanimity.” | Mr. Draghi said the moves adopted Thursday had the backing of the entire governing council of the central bank, which voted earlier in the day — support that he called “an extraordinary degree of unanimity.” |
| The interest rate cuts, including the move to a negative rate on deposits, had become all but certain after data earlier in the week showed that inflation in the euro zone fell to an annual rate of 0.5 percent in May, a level considered perilously low. | The interest rate cuts, including the move to a negative rate on deposits, had become all but certain after data earlier in the week showed that inflation in the euro zone fell to an annual rate of 0.5 percent in May, a level considered perilously low. |
| The fear is that the minuscule rises in wages and prices could lapse into outright declines — an economically debilitating condition known as deflation, which is characterized by a downward spiral of prices, corporate profits and hiring. Deflation has already plagued the economies of several of the weaker euro zone countries, including Greece. | |
| “Ultimately the macroeconomic consequences of a small negative rate are likely to be minimal,” Luke Bartholomew, a fund manager at Aberdeen Asset Management, said in a note after the central bank’s announcement. “But it should put downward pressure on the euro and it is an important signal of the ECB’s deflation fighting intent.” | “Ultimately the macroeconomic consequences of a small negative rate are likely to be minimal,” Luke Bartholomew, a fund manager at Aberdeen Asset Management, said in a note after the central bank’s announcement. “But it should put downward pressure on the euro and it is an important signal of the ECB’s deflation fighting intent.” |
| Imposing a negative deposit rate is meant to give a positive jolt to the euro zone economy. In the annals of central banking, though, negative deposit rates have rarely been tried. Denmark had one until April, but the impact on an economy as large as the euro zone’s is largely unknown. | Imposing a negative deposit rate is meant to give a positive jolt to the euro zone economy. In the annals of central banking, though, negative deposit rates have rarely been tried. Denmark had one until April, but the impact on an economy as large as the euro zone’s is largely unknown. |
| “Negative deposit rates have not been used at this scale before and could have unpredictable consequences,” Christian Schulz, a senior economist at Berenberg Bank, said in a note ahead of the central bank meeting. | “Negative deposit rates have not been used at this scale before and could have unpredictable consequences,” Christian Schulz, a senior economist at Berenberg Bank, said in a note ahead of the central bank meeting. |
| Many economists have already criticized the moves, which were widely expected, as inadequate to combat the deflation threat that Mr. Draghi has acknowledged. | Many economists have already criticized the moves, which were widely expected, as inadequate to combat the deflation threat that Mr. Draghi has acknowledged. |
| As a result, the reaction and commentary is now likely to focus even more on whether the bank will sooner or later be forced to buy government bonds or private assets in amounts large enough to restart lending in areas of the euro zone that are starved of credit. | As a result, the reaction and commentary is now likely to focus even more on whether the bank will sooner or later be forced to buy government bonds or private assets in amounts large enough to restart lending in areas of the euro zone that are starved of credit. |
| The United States, Britain and Japan have all used such asset buying — so-called quantitative easing — to jump-start their economies when there was no room left to cut interest rates. | The United States, Britain and Japan have all used such asset buying — so-called quantitative easing — to jump-start their economies when there was no room left to cut interest rates. |
| But the European Central Bank has been reluctant to do so, in part because of the politically treacherous task of selecting which assets to buy from among the euro zone’s 18 quarrelsome members. | But the European Central Bank has been reluctant to do so, in part because of the politically treacherous task of selecting which assets to buy from among the euro zone’s 18 quarrelsome members. |
| “There remains no chance of the E.C.B. going for large purchases of sovereign bonds even later in the year, unless a major adverse shock occurs,” Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said in a blog post earlier this week. | “There remains no chance of the E.C.B. going for large purchases of sovereign bonds even later in the year, unless a major adverse shock occurs,” Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington, said in a blog post earlier this week. |
| But in response to a question about quantitative easing, Mr. Draghi seemed to leave open that possibility. | |
| “We think this is a significant package,” he said of the moves on Thursday. “Are we finished? The answer is no. If need be, within our mandate, we aren’t finished yet.” | “We think this is a significant package,” he said of the moves on Thursday. “Are we finished? The answer is no. If need be, within our mandate, we aren’t finished yet.” |
| The central bank last cut interest rates in November. During the last month, Mr. Draghi and other members of the central bank’s governing council have sent strong signals that a negative deposit rate was in the works, in part to allow banks to prepare. | The central bank last cut interest rates in November. During the last month, Mr. Draghi and other members of the central bank’s governing council have sent strong signals that a negative deposit rate was in the works, in part to allow banks to prepare. |
| The prospect of a negative deposit rate has already contributed to a decline in the euro currency against the dollar in recent weeks, as investors moved their money to places offering a better return. | The prospect of a negative deposit rate has already contributed to a decline in the euro currency against the dollar in recent weeks, as investors moved their money to places offering a better return. |
| One of the bank’s aims is to weaken the euro, which allows exporters in the euro zone to sell their products more cheaply abroad. A weaker euro also tends to push up inflation by raising the prices of fuel and other imported goods. | One of the bank’s aims is to weaken the euro, which allows exporters in the euro zone to sell their products more cheaply abroad. A weaker euro also tends to push up inflation by raising the prices of fuel and other imported goods. |
| The central bank aims for an inflation rate of close to 2 percent. For most of its history, it was preoccupied with keeping inflation from exceeding that rate. But in recent months, the bank has been struggling to raise inflation closer to that target, which the bank considers an optimal level because wages and prices would rise fast enough to stimulate the economy, without overheating it. | The central bank aims for an inflation rate of close to 2 percent. For most of its history, it was preoccupied with keeping inflation from exceeding that rate. But in recent months, the bank has been struggling to raise inflation closer to that target, which the bank considers an optimal level because wages and prices would rise fast enough to stimulate the economy, without overheating it. |
| As an indication that pumping up the inflation rate could be a slow process, Mr. Draghi said Thursday that the central bank is forecasting a rate of 0.7 percent for this year, 1.1 percent next year and 1.4 percent in 2016 — still short of the bank’s target of just below 2 percent. | As an indication that pumping up the inflation rate could be a slow process, Mr. Draghi said Thursday that the central bank is forecasting a rate of 0.7 percent for this year, 1.1 percent next year and 1.4 percent in 2016 — still short of the bank’s target of just below 2 percent. |
| Economists regard modest inflation as a good thing, although they argue about the ideal rate. Inflation helps debtors because it effectively lowers the value of debts. And inflation helps reduce the risk that, because of imperfections in the way prices are measured, deflation will infect the economy before policy makers can take countermeasures. | Economists regard modest inflation as a good thing, although they argue about the ideal rate. Inflation helps debtors because it effectively lowers the value of debts. And inflation helps reduce the risk that, because of imperfections in the way prices are measured, deflation will infect the economy before policy makers can take countermeasures. |
| Deflation is notoriously difficult to combat. Japan has been trying to escape the effects of deflation for the better part of two decades. | Deflation is notoriously difficult to combat. Japan has been trying to escape the effects of deflation for the better part of two decades. |
| Several countries in the euro zone are already suffering from deflation, in particular Greece, where many workers have suffered steep declines in wages. Companies have been forced to cut their prices, and tax revenues have declined, making it even harder for the Greek government to service its huge debts. | Several countries in the euro zone are already suffering from deflation, in particular Greece, where many workers have suffered steep declines in wages. Companies have been forced to cut their prices, and tax revenues have declined, making it even harder for the Greek government to service its huge debts. |