 "ECB cuts rates, launches new credit scheme as growth evaporates")
The European Central Bank (ECB) cut interest rates to a fresh record low on Thursday and launched a new scheme to push money into the flagging Euro zone economy.
In a series of measures underscoring growing concern about the currency bloc’s health, the ECB cut its main refinancing rate to 0.05 per cent from 0.15 per cent previously and drove the overnight deposit rate deeper into negative territory, now charging banks 0.20 per cent to park funds with it.
The Euro zone flatlined in the second quarter of the year and the Ukraine crisis is now weighing heavily on business confidence.
“In particular, the loss in economic momentum may dampen private investment, and heightened geopolitical risks could have a further negative impact on business and consumer confidence.” New ECB economic forecasts predicted slower growth this year — of just 0.9 per cent — picking up to 1.6 per cent in 2015.
The forecast for inflation, now running at just 0.3 per cent, was cut to 0.6 per cent, rising to 1.1 per cent in 2015, still way below the ECB’s target of close to but below 2 per cent.
Draghi said if inflation looked like staying too low for too long, the ECB Governing Council was unanimous in its commitment to using other “unconventional instruments” — a phrase taken as code for printing money as the US Federal Reserve and Bank of England have.
He added that Thursday’s decisions were not supported unanimously by his colleagues although there was a “comfortable majority”.
Draghi also announced plans for an asset-backed securities (ABS) and covered bond purchase programme to help ease credit conditions in the bloc. Sources told Reuters it could amount to euro 500 billion ($650 billion) over three years.
Asset-backed securities are created by banks pooling mortgages and corporate, auto or credit card loans and selling them to insurers, pension funds or now even the ECB.
Covered bonds are similar instruments but the underlying assets are ringfenced so if the bank goes bust, the assets are still there. That makes them safer than ABS where the underlying loans are not ringfenced.
“At the margin, (the cuts) may have some small positive effect on bank lending and activity and perhaps give the euro another downward nudge,” said Jonathan Loynes, chief European economist at Capital Economics.
BoE holds rates
The Bank of England kept interest rates on hold on Thursday as Britain’s economy continued to thrive, although risks to the recovery both at home and abroad remain. The BoE’s Monetary Policy Committee left its Bank Rate at 0.5 per cent, where it has been since the depths of the financial crisis more than five years ago.
In a series of measures underscoring growing concern about the currency bloc’s health, the ECB cut its main refinancing rate to 0.05 per cent from 0.15 per cent previously and drove the overnight deposit rate deeper into negative territory, now charging banks 0.20 per cent to park funds with it.
The Euro zone flatlined in the second quarter of the year and the Ukraine crisis is now weighing heavily on business confidence.
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“The Governing Council sees the risks surrounding the economic outlook for the euro area on the downside,” ECB President Mario Draghi told a news conference.
“In particular, the loss in economic momentum may dampen private investment, and heightened geopolitical risks could have a further negative impact on business and consumer confidence.” New ECB economic forecasts predicted slower growth this year — of just 0.9 per cent — picking up to 1.6 per cent in 2015.
The forecast for inflation, now running at just 0.3 per cent, was cut to 0.6 per cent, rising to 1.1 per cent in 2015, still way below the ECB’s target of close to but below 2 per cent.
Draghi said if inflation looked like staying too low for too long, the ECB Governing Council was unanimous in its commitment to using other “unconventional instruments” — a phrase taken as code for printing money as the US Federal Reserve and Bank of England have.
He added that Thursday’s decisions were not supported unanimously by his colleagues although there was a “comfortable majority”.
Draghi also announced plans for an asset-backed securities (ABS) and covered bond purchase programme to help ease credit conditions in the bloc. Sources told Reuters it could amount to euro 500 billion ($650 billion) over three years.
Asset-backed securities are created by banks pooling mortgages and corporate, auto or credit card loans and selling them to insurers, pension funds or now even the ECB.
Covered bonds are similar instruments but the underlying assets are ringfenced so if the bank goes bust, the assets are still there. That makes them safer than ABS where the underlying loans are not ringfenced.
“At the margin, (the cuts) may have some small positive effect on bank lending and activity and perhaps give the euro another downward nudge,” said Jonathan Loynes, chief European economist at Capital Economics.
BoE holds rates
The Bank of England kept interest rates on hold on Thursday as Britain’s economy continued to thrive, although risks to the recovery both at home and abroad remain. The BoE’s Monetary Policy Committee left its Bank Rate at 0.5 per cent, where it has been since the depths of the financial crisis more than five years ago.