ECB moves to fire up economy, boost inflation with bold measures

The European Central Bank surprised markets on Thursday by cutting all three of its key interest rates as part of a bolder-than-expected package of measures to head off dangerously low inflation and fire up the sluggish eurozone economy.

The ECB plan also includes ramping up its bond-buying programme by a bigger-than-forecast 20 billion euros (22 billion dollars) to 80 billion euros a month.

The ambitious set of measures came after the ECB's last stimulus efforts in December fell short of market expectations.

ECB chief Mario Draghi said at a press conference that since December "conditions have significantly changed due to the weakening of the global growth prospects."

Interest rates, he said, would remain "a present or lower levels for a very long period time and well past the horizon of our net asset-purchase," which is currently March 2017.

"We don't anticipate it will be necessary to reduce rates further," he continued.

After falling sharply when the ECB announced the package, the euro staged a dramatic turnaround following Draghi's comments on interest rates, rising by 0.6 per cent to 1.1070 dollars.

Since taking office in November 2011, Draghi has regularly abandoned the ECB's previous cautious approach to monetary affairs by unveiling a series of audacious moves aimed at shoring up the 19-member eurozone economy and ensuring the stability of the euro.

Draghi said the plan announced on Thursday was "a comprehensive package", which included steps "to counteract heightened risks" to the ECB's annual inflation target of just below 2 per cent.

Consumer prices in the 19-member eurozone tumbled back into negative territory last month when they fell by 0.2 per cent year-on-year, the European Commission's statistics office Eurostat said last week.

The slide in consumer prices also forced the ECB to revise down its inflation outlook for the currency bloc with the bank also scaling back its economic growth projection.

Draghi said inflation would remain in negative territory for the coming before picking up by the end of the year. But he insisted that the eurozone was not facing a period of deflation.

Inflation should come in at a meagre 0.1 per cent this year before accelerating to 1.6 per cent in 2018, according to the ECB projections. The economy should expand by 1.4 per cent this year.

In addition to cutting its benchmark refinancing rate for the first time to zero, the ECB lowered the deposit rate deeper into negative territory and trimmed its marginal lending rate.

"We take this as a strong message from the ECB to the markets, that the ECB is willing to use nearly all of its levers to lean against a deteriorating inflation outlook," said Barclays Bank economist Philippe Gudin.

The ECB hopes the 10-basis point cut in the deposit rate to minus 0.4 per cent will force financial houses to stop amassing funds at the bank and instead pump the money back into the eurozone economy through lending to households and the corporate sector.

The deposit rate is the penalty the ECB charges financial houses for parking funds at the bank.

Negative borrowing rates are a controversial monetary instrument with banks arguing that negative rates erode their profits because they represent a charge on their spare cash.

But Draghi said that the ECB has had a positive experience with negative rates, saying that on aggregate their impact on bank profits was not so pronounced.

The ECB also surprised markets by trimming its marginal rate, which banks use to borrow from the ECB overnight, to 0.25 per cent from 0.3 per cent.

Last update: Fri, 24/06/2016 - 08:49
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