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ECB cuts rates in surprise move to help boost flagging eurozone ECB cuts rates in surprise move to help boost flagging eurozone
(about 21 hours later)
The European Central Bank surprised markets with fresh measures to boost the eurozone's flagging economy and ward off the risks posed by Russian aggression in Ukraine. The European Central Bank surprised markets on Thursday with fresh measures to boost a flagging eurozone economy threatened with deflation and the risks of an escalating conflict in Ukraine.
Policymakers ramped up efforts to protect the single currency region's weak recovery and combat the threat of deflation by announcing a 10 basis-point cut in its main interest rate, taking it to a new all-time low of 0.05%. The ECB cut the deposit rate, already in negative territory, from -0.1% to -0.2%. This makes it even more expensive for banks to park cash with the ECB, which is hoping they will now be more willing to lend to businesses and consumers. Policymakers cut the already ultra-low main interest rate from 0.15% to 0.05%. They also made it more expensive for banks to park money with the ECB – cutting the deposit rate, which was already negative, from -0.1% to -0.2% in the hope of persuading banks to lend more to businesses and consumers.
The ECB has also agreed to start buying asset-backed securities and covered bonds from October, but stopped short of embarking on full-scale quantitative easing (QE) which would potentially involve the bank purchasing government debt. The action took investors by surprise and drove the euro down more than two cents against the dollar to a 14-month low of $1.29. A weaker currency helps the eurozone's exporters.
The ECB president, Mario Draghi, revealed the 24-strong governing council was split over the package of new measures, but said a "comfortable majority" was in favour despite the dissent. In London the Bank of England held rates at a record low of 0.5% for the 66th monthly meeting in a row.
European stock markets rose following the decisive action from the ECB president, Mario Draghi, and his colleagues on the governing council. The FTSEurofirst 300 index, which tracks the biggest companies across the region, rose 1.2% to its highest close since January 2008.
"The ECB stepped up to the plate as the eurozone recovery is grinding almost to a halt," said Christian Schulz, a senior economist at the German bank Berenberg.
The central bank announced further measures to encourage lending by buying asset-backed securities. Full details will be published in October, Draghi said.
The ECB stopped short of embarking on full-scale quantitative easing (QE) which would potentially involve the bank purchasing government debt.
Draghi revealed the 24-strong governing council was split over the package of new measures, but said a "comfortable majority" was in favour. It is thought that Jens Weidmann, the president of Germany's Bundesbank, was opposed.
Speaking at a press conference following the decision, he said the eurozone's member states were also divided over QE.Speaking at a press conference following the decision, he said the eurozone's member states were also divided over QE.
"QE was discussed. Some members of the governing council were in favour of doing more, and some members were in favour of doing less. So our proposals strike the mid road. Some [central bank] governors made it clear they would like to do more." "QE was discussed. Some members of the governing council were in favour of doing more, and some members were in favour of doing less. So our proposals strike the mid road." Draghi said interest rates would not be cut further.
The unexpected measures sent the euro to a 14-month low against the dollar, at $1.3036. A weaker currency helps the eurozone's exporters, making the cost of their goods cheaper abroad. European stock markets and bonds were boosted by the news, which reassured investors in the face of heightened risks to recovery. Carsten Brzeski, an economist at ING, said: "With another rate cut, an ABS purchasing programme and a new covered bond purchasing programme, the ECB has now reached a point at which fully fledged QE, ie outright purchases of government bonds, is the only option left."
Trevor Greetham, director of asset allocation at Fidelity Worldwide Investment, said: "There is no further room to cut rates so the focus is now squarely on the liquidity injections and asset purchase programmes already announced. The ECB nudged down its forecast for eurozone growth this year to 0.9%, from an earlier forecast of 1%. It also revised down its growth forecasts for 2015 to 1.6%, from 1.7%, but it revised up its forecast for 2016 to 1.9%, from 1.8%.
"Draghi kept the door open to sovereign bond purchases and he continued to talk the euro down by drawing attention to other central banks heading towards tightening. All told, today's policy changes aren't enough to cause growth to come surging back in the euro area." It lowered its forecast for inflation this year to 0.6% from a previous forecast of 0.7%, but Draghi said policymakers did not expect outright deflation, despite a current inflation rate of just 0.3%.
The ECB revised down its forecast for eurozone growth this year to 0.9%, from an earlier forecast of 1%. It also revised down its growth forecasts for 2015 to 1.6%, from 1.7%, but it revised up its forecast for 2016 to 1.9%, from 1.8%.
It lowered its forecast for inflation this year to 0.6% from a previous forecast of 0.7%, but Draghi said policymakers did not expect outright deflation, despite a current inflation rate of just 0.3%, sharply below the official target of close to 2%.
The ECB left its inflation forecast for 2015 and 2016 unchanged at 1.1% and 1.6% respectively.The ECB left its inflation forecast for 2015 and 2016 unchanged at 1.1% and 1.6% respectively.
There was zero growth in the eurozone economy in the second quarter, following 0.2% growth in the first quarter. Fears are mounting that rising tensions between the west and Russia, fuelled by the alleged presence of Russian troops in Ukraine, will derail the weak recovery as the effects of sanctions and heightened uncertainty are felt. There was zero growth in the eurozone economy in the second quarter, following 0.2% growth in the first quarter. Fears are mounting that rising tensions between the west and Russia, fuelled by the alleged presence of Russian troops in Ukraine, will derail the weak recovery.
Draghi made it clear that eurozone countries must press ahead with structural reforms and growth friendly fiscal policies, expressing frustration with resistant countries.
"It's very difficult for us to reach our inflation target of below but close to 2% based on monetary policy [alone]. You need growth, you need lower unemployment ... you need structural reforms. There isn't any grand bargaining here, each of us needs to do our job."
The latest action from the ECB follows a string of measures in June, when it cut interest rates and took the deposit rate into negative territory, as well as announcing a cheap €400bn (£318bn) package of funding for banks.