ECB cuts in­ter­est rates to zero

The Pak Banker - - OPINION - Katie Allen

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%.

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