Featured # Business Headlines | 3 years ago

ECB Going the Distance For Dealing With Rate Cuts

The European Central Bank released some of its final remaining stimulus weapons on Thursday, chopping all three of its interest rates and growing asset buying to help build up the economy and hinder ultra-low inflation becoming indefinite. While the deposit rate was slashed 10 basis points to -0.4 percent, the main refinancing value was brought down to zero from 0.05 percent and its marginal lending rate – used by financial institutes to borrow from the ECB overnight – fell to 0.25 percent from 0.3 percent.

“Rates will stay low, very low, for a long period of time and well past the horizon of our purchases,” Mario Draghi the President of ECB, judged to have disappointed markets in December with measures lower than the set goals. He added, “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,”.

The ECB stated it would also begin to purchase corporate debt and start  four new rounds of affordable loan packages, to be extended by financial institutes to the physical economy. Slashing its 2016 inflation forecast from one percent to just 0.1 percent, the Bank said further rounds of ultra-cheap four-year loans to banks could include extra financial sweeteners for them to take up the offer to pass on to others. “A bank that is very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities,” Draghi noted.

“Good news for Europe: Having delivered less than expected in December, the ECB returned to its usual form today and eased policy by a bit more than projected,” said Holger Schmieding at Berenberg bank. He recognized the cap on negative rates and stated any future endeavors would likely have to focus on other, non-conventional measures. “Does it mean that we can go as negative as we want without having any consequences on the banking system? The answer is no,” he said.

The ECB has next to nothing to show for the almost 1 trillion  euros it has spent purchasing government bonds and other assets in the past year, as tumbling raw materials prices take the impact of its quantitative easing. That increases the concern that people will lose faith in the bank’s commitment to its mandate.

Inflation has been lower than the ECB’s nearly 2 percent goal for three years and is likely to stand for many more. The ECB’s move came after the G20 group of the world’s major economies last month agreed they need to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor. The U.S. Federal Reserve, the Bank of Japan, Bank of England and Swiss National Bank are all set to meet next week.


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