ECB cuts rates, extends monthly asset purchases
Draghi delves deeper into monetary toolbox
THE European Central Bank (ECB) cut a key interest rate yesterday and announced an extension of its monthly asset purchases, but the euro leapt higher as financial markets signalled that they had been expecting yet more stimulus.
Delving deeper into the bank’s monetary toolbox, ECB chief Mario Draghi said the bank would not only include euro-denominated regional and local debt in its purchases, but would look to reinvest principal payments in the scheme. “This will contribute both to favourable liquidity conditions and to an appropriate monetary policy stance,” Draghi said, without saying how much that could add to overall purchases currently hitting €60 billion (R916bn) a month.
Draghi added that the central bank did not add to its monthly asset purchase programme because extending the scheme and reinvesting proceeds were deemed sufficient.
“Our asset purchase programme is flexible. It can always be adjusted. We decided the extension of our horizon and, especially, the reinvestment of principal would be sufficient,” he said.
The quantitative easing asset-buying programme would continue “until the end of March 2017 or beyond if necessary”, he added, spelling out that the central bank’s priority of hitting a medium-term target of inflation at just under 2 percent.
It had been due to end around September 2016.
Earlier the bank cut its deposit rate to minus 0.3 percent from its existing minus 0.2 percent, effectively charging banks more for parking cash with the central bank, reversing its earlier guidance that rates had bottomed out.
But the euro hit a four-week high of $1.0894 (R14.3907), over 2 percent up on the day, and the pan-European FTSEurofirst 300 fell deeper into negative territory in a sign financial markets had been expecting Draghi to provide more stimulus. “Bear in mind that ‘Super Mario’ has accustomed market participants to surpass their lofty expectations,” Stephane Ekolo, the chief European strategist at Market Securities, said, using a common Draghi nickname. “Maybe ‘Super Mario’ is saving ammunition for another occasion.”
Draghi stressed that risks to the world economy and to the inflation outlook remained skewed to the downside. He added that he did not rule out the use of other instruments if they were needed.
Responding to reporters’ questions over possible future action and whether interest rates were now at their lower bound, Draghi said: “We are not going to be hampered in this by technical issues.”
With inflation running near zero and likely to miss the bank’s target of almost 2 percent for years to come, the ECB had all but committed to action.
The bank’s governing council had also been expected to have discussed more extreme ideas, possibly a two-tier deposit rate that would punish banks parking too much cash with the central bank or the purchase of municipal and corporate debt.
But many of those proposals were seen meeting resistance within the council. Critics of easing, led by the governing council’s two German members, argue that monetary policy is already exceptionally loose and the biggest reason inflation is hovering near zero is the fall in oil prices, which is a boost for growth as lower energy costs leave households with more to spend.
The US Federal Reserve’s expected interest rate hike this month also complicates ECB action. Fed chairwoman Janet Yellen said on Wednesday that she was “looking forward” to a US interest rate rise, but an unexpectedly weak manufacturing survey this week had also raised fresh doubts about the Fed’s rate path. – Reuters