ECB makes surprise rate cut to avert deflation

By Korea Herald
  • Published : Sept 5, 2014 - 20:15
  • Updated : Sept 5, 2014 - 20:15
FRANKFURT, Germany (AFP) ― The European Central Bank surprised financial markets on Thursday with a new cut in key interest rates and other measures to ward off deflation in the single currency area.

The announcement sent the euro down to the lowest level against the dollar for 13 months, and boosted European and U.S. stocks.

Against a background of growing concern that the euro zone is on the verge of a dangerous spiral of falling prices, the ECB cut its central “refi” refinancing rate to 0.05 percent from 0.15 percent.

It also lowered the deposit rate to minus 0.20 percent and trimmed its marginal lending rate to 0.30 percent.

In addition, at a news conference afterwards, ECB chief Mario Draghi unveiled plans to buy asset-backed securities to help kick-start credit in the region, as well as a program to purchase covered bonds.

Both of these schemes would start in October, with details to be announced after the ECB’s October meeting, Draghi said.

But the central bank’s anti-deflation tools need not stop there.
Mario Draghi, president of the European Central Bank, smiles as he attends the ECB press conference in Frankfurt, Germany, Thursday. (EPA-Yonhap)

“Should it become necessary to further address risks of too prolonged a period of low inflation, the governing council is unanimous in its commitment to using additional unconventional instruments within its mandate,” Draghi vowed in what markets took as a hint at what is known as “quantitative easing.”

Draghi said a “QE” program ― a radical policy used by other central banks such as the U.S. Federal Reserve and Bank of England of buying securities on a big scale to inject cash into the economy ― had been discussed.

But for the time being the governing council had opted for a narrower ABS scheme instead.

Asset-backed securities are bundles of individual loans such as mortgages, auto credit and credit-card debt that are sold on to investors, allowing banks to share the risk of default and encouraging them to offer more credit.

Draghi revealed that the decisions were “not unanimous.”

“Some governors were in favor of doing more, some were in favor of doing less,” he said.

Nevertheless, the measures adopted were agreed by a “comfortable majority” on the decision-making governing council, Draghi said.

The need to act became necessary as the growth and inflation outlook continues to cloud over.

According to the ECB’s own latest forecasts, gross domestic product is expected to expand by 0.9 percent in 2014 and 1.6 percent in 2015, lower than previous projections.

The bank said inflation was expected to come in at just 0.6 percent this year, way off the ECB’s target of 2.0 percent.

Inflation cannot be brought back up to target by means of monetary policy alone, and governments must also play their part with reforms, Draghi insisted.