ECB President Mario Draghi. / Sergio Garcia, AFP
The European Central Bank moved aggressively Thursday to boost a tepid economic recovery and ward off the threat of deflation by cutting its main interest rate to a record low 0.15%. It also took new steps to increase lending.
In an unprecedented measure, the ECB cut its interest rate on deposits to minus 0.1% for the first time. A negative deposit rate implies that the ECB will now be charging the region's banks to hold onto their reserves, a situation that may spur banks to ramp up lending.
"Today we decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy," Mario Draghi, the ECB's president, said in a news conference in Frankfurt.
"The governing council is unanimous in its commitment to using unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation," Draghi said.
Still, while the ECB on Thursday effectively reduced interest rates to around zero, it held off on introducing what is widely considered to be the main non-conventional stimulus measure used by central banks, including the Federal Reserve, in recent times. The ECB did not pull the trigger on quantitative easing, or QE, as it is commonly understood - a program that sees a central bank buy large amounts of government bonds and other securities to boost liquidity and lending.
Instead, in a news conference in Frankfurt, ECB President Mario Draghi introduced a package of targeted measures to boost cheap credit including offering long-term loans at reduced rates until 2018 and doing "preparatory work" to begin buying batches of loans for small businesses.
The euro currency fell against the dollar after the decision was announced.
Investors had been expecting some kind of action Thursday from Draghi following comments made last month by Europe's most powerful central banker that the ECB would be "comfortable acting next time." And the monetary policy move comes as the eurozone economy grew only 0.2% in the first quarter and inflation is hovering around 0.5%, well below the ECB's goal of just under 2%. A sustained low inflation rate has led to fears that the region could get caught in a cycle of falling prices, or deflation, a scenario that stifled Japan's economy for years.
"Steady disinflation has plagued the eurozone since late 2011. The ECB attempted to push back against the trend last November by slashing its policy rate from 50 to 25 basis points, but the move proved ineffective," said Ilya Spivak, a currency strategist at DailyFX, in e-mailed comments.
Unlike in the USA, Great Britain and Japan, European policy makers have yet to make use of QE. That's partly because the ECB has no clear mandate to purchase individual sovereign bonds while at the same time there is no such thing as an ECB bond.
In a blog post published on its website the ECB pointed out that the negative deposit rate will have no impact on the savings of ordinary depositors. "Only banks that deposit money in certain accounts at the ECB have to pay," the post said, adding that "Commercial banks may of course choose to lower interest rates for savers."
Bill Adams, an economist at PNC Financial Services Group, said that the ECB's interest rate cuts were more aggressive than expected but also showed that the ECB is not yet ready for quantitative easing.
The Bank of England separately on Thursday kept its key benchmark interest rate at a record low 0.5%. The decision to stand pat comes amid signs that the British economy is strengthening.
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