ECB cuts key rate, primes anti-deflation guns

FRANKFURT: The European Central Bank (ECB) stepped up efforts to kick start chronically low inflation in the euro area at a meeting Thursday, cutting a key interest rate and preparing further measures to ease monetary conditions in the single currency area.

At the ECB’s last monetary policy meeting of the year, the governing council decided that the key deposit rate, already in negative territory, would be lowered by a further 0.10 percentage point to minus 0.30%.

The deposit rate is normally the interest banks would receive from parking cash overnight at the ECB. But it has been in negative territory since June 2014, meaning banks effectively have to pay the ECB to hold their funds.

The idea behind the negative interest rate is to persuade banks to lend the money to businesses and households rather than store it at the ECB.

The ECB held its other two key rates -- the refi and marginal lending rates -- unchanged at 0.05% and 0.30% respectively.

The ECB also said that president Mario Draghi would announce “further monetary policy measures” at his traditional post-meeting news conference.

Analysts expect Draghi to announce a beefing up of the bank’s controversial bond purchase programme, known as QE. (For the latest update on this, see ECB extends its asset buying programme.)

In a bid to bring eurozone inflation back up to levels conducive to healthy economic growth, the ECB has already unleashed an unprecedented series of easing measures.

It has slashed borrowing costs, made vast amounts of cheap loans available to banks and most recently embarked on a programme to buy around 60 billion euros of sovereign bonds each month until at least September 2016.

But inflation across the eurozone is still stubbornly low, standing at just 0.1% in November, far below the ECB’s target of just under 2.0%.

And so analysts expect the programme to be increased and extended beyond September 2016.

ING DiBa economist Carsten Brzeski saw the moves as “Santa Mario’s early Christmas presents” to the markets.

Nevertheless, “this is less of a rate cut than markets and we had expected,” and probably meant the so-called “hawks” on the governing council -- those against additional easing -- “had more leverage than expected,” Brzeski said.

The rate cut “was the ECB’s first part of what we expect to be an early and copious gift giving for the eurozone. The rate cut shows the ECB’s determination to further weaken the euro exchange rate and thereby supporting economic growth through exports,” the expert added. - AFP