ECB cuts interest rates to zero
THE European Central Bank has cut interest rates across the eurozone to zero as it unveiled an unprecedented package of growth-boosting measures against the backdrop of a fragile global economy. Amid growing concerns of a fresh economic crash, the eurozone's central bank surprised financial markets by cutting interest rates in the region to an all-time low, expanding its money printing programme and reducing a key bank deposit rate further into negative territory.
The ECB chief, Mario Draghi, implied interest rates would stay "very low" for at least another year and predicted the region would remain mired in negative inflation for months to come. But he played down speculation that interest rates could be cut even further. "From today's perspective and taking into account the support of our measures to growth and inflation, we don't anticipate that it will be necessary to reduce rates further. Of course, new facts can change the situation and the outlook," he told a news conference.
The Frankfurt-based institution hopes its latest barrage of measures will get money into the financial system by discouraging banks from holding on to deposits. The expectation is that financial institutions will instead lend out money as cheaply as possible to businesses and households.
In the UK, ministers campaigning for the country to stay in the EU will be hoping the latest package of ECB support will ward off a fresh crisis in the eurozone, because financial turmoil could undermine their case ahead of June's referendum.
The measures went well beyond what investors had been expecting and led to wild swings on already febrile financial markets. The euro initially plunged as record low interest rates were announced, before bouncing back as Draghi implied this was the lowest the central bank would go on borrowing costs.
Going further than economists had expected, the ECB reduced the eurozone's main interest rate from 0.05% to zero, also cut its two other interest rates, expanded its quantitative easing (QE) programme and announced new ultra-cheap, four-year loans to banks, allowing them to borrow from the ECB at negative interest rates.
On stock markets, share prices were boosted when the rate cuts were announced but gains were cut as Draghi suggested there was no additional help to come.
"The ECB attempted to exceed market expectations with a strong set of non-conventional monetary policy measures but then dis- appointed the market on forward guidance around further interest rate reductions - effectively suggesting that interest rates had reached their nadir," said Marilyn Watson at fund manager BlackRock.
As expected by markets, the ECB cut its deposit rate by 10 basis points, further into negative territory to -0.4%. The latest cut in the deposit rate means the ECB will be charging banks more to hold their money overnight, with the aim of encouraging them to lend it to businesses. The marginal lending rate, paid by banks to borrow from the ECB overnight, was cut from 0.3% to to 0.25%.
The ECB expanded its QE programme to €80bn (£61bn) a month, up from €60bn. Under QE, the central bank pumps money into the eurozone by buying bonds off financial institutions in the expectation that they will reinvest the proceeds elsewhere in the European economy. The QE programme will now include buying bonds issued by companies and not just by financial institutions.
Draghi and his fellow policymakers had come under growing pressure to increase support for the eurozone's economy after the single-currency bloc slipped back into negative inflation in February.
The ECB chief used a news conference to insist the region was not in full-on, Japanstyle deflation and to rebuff growing fears that central banks have run out of ammunition to fight sluggish economic growth and revive price rises. Negative inflation is viewed as economically dangerous because falling prices can create a downward spiral of economic growth, by dissuading businesses and consumers from spending in the expectation that prices will fall further. Without Thursday's measures, the eurozone would have faced "disastrous deflation", Draghi added. The ECB is predicting inflation in the eurozone will be just 0.1% this year, 1.3% in 2017 and 1.6% in 2018 - all under its target for inflation, close to but below 2%.