News Column

European Central Bank cuts interest rates to historic lows

June 5, 2014

Frankfurt (Alliance News) - European Central Bank chief Mario Draghi left the door open Thursday to further monetary stimulus measures after the ECB cut its key interest rates as part of a far-reaching package aimed at hauling the eurozone out of a low inflation spiral.

In addition to cutting interest rates to historic lows, Draghi unveiled a slew of steps aimed at boosting liquidity in the 18-member eurozone so as to break credit bottlenecks in the currency bloc and spur growth in the region's fragile economy.

"We think this is a significant package," Draghi told a press conference. "Are we finished? No."

"The governing council is unanimous in its commitment to using also unconventional instruments," Draghi told reporters referring to measures other than changes in interest rates.

He said the bank was at present carrying out "preparatory work" on a programme of direct purchases of asset-backed securities as part of possible next steps to ensure the eurozone remained on an economic growth path.

At the same time, Draghi dampened expectations of further cuts in the cost of money after the bank delivered a 10-basis-point reduction in both its benchmark refinancing and deposit rates.

This reduced the refinancing rate to a record low of 0.15% and lowering the deposit rate to minus 0.1%.

Taking the deposit rate into negative territory has the effect of charging banks for depositing funds with the ECB and represents the first time that a major central bank has cut rates to below zero.

"For all practical purposes we have reached the lower band," Draghi said, but added he could not exclude some minor technical changes.

The reductions in borrowing costs were combined with a new targeted longer-term refinancing operations as well as a prolongation of the fixed-rate full allotment tender procedures.

ECB hopes these plans will boost bank lending in particular to credit-starved small-to-medium sized businesses in economically vulnerable parts of the eurozone such as Spain, Italy and Greece.

The bundle of measures announced by Draghi sent shares higher while pushing the euro to a four-month low of 1.35 dollars. The currency bounced back above 1.36 dollars in late afternoon trading.

The eurozone blue-chip Eurostoxx 50 index was 0.7% higher at 3,261 points, while Germany's benchmark DAX share index at one point breached the 10,000 mark for the first time.

In New York the Dow Jones Industrial Average and the broader Standard & Poor's 500 Index rose to record highs. The Dow industrials closed at 16,836.11 points, while the S&P 500 climbed to 1940,46.

Annual inflation in the currency bloc weakened more than forecast to 0.5% in May, according to official data released this week.

This took consumer prices deeper into what Draghi has described as the danger zone - inflation below 1%.

However, he once again rejected suggestions that the eurozone faced a period of deflation similar to that which haunted Japan for the best part of two decades.

"We don't see deflation," Draghi said adding there was no evidence of the hallmarks of deflation emerging in the eurozone such as households postponing purchases in anticipation of lower prices.

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Source: Alliance News

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