ECB acts to boost eurozone with rate cut and asset purchases

The European Central Bank has cut interest rates to a record low and launched a programme of private-sector asset purchases as it ratcheted up attempts to counter the threat of economic stagnation across the eurozone.

The governing council on Thursday cut its benchmark main refinancing rate from 0.15 per cent to 0.05 per cent and said it would charge lenders 0.2 per cent, up from 0.1 per cent, for their deposits parked at the central bank.

During a press conference, ECB President Mario Draghi revealed a further escalation of the bank’s bid to stimulate the eurozone’s ailing economy with a programme to purchase a “broad portfolio of transparent asset backed securities” starting from October this year.

He also launched a programme of purchases of covered bonds, securities backed by cash flows from mortgages or public sector loans. These schemes would have a “sizeable impact on our balance sheet,” Mr Draghi said.

The euro fell below $1.30 to a low of $1.2995 on the back of the ECB’s announcements. The single currency is now down almost 5 per cent against the dollar since the beginning of July.

European government bond yields also tumbled at the news with the yield on Italian 10-year bonds falling by 11 basis points to 2.36 per cent. Spanish 10-year bonds dropped 11 bps to 2.16 per cent. Equities bounced as France’s share market barometer, the CAC 40, rose 0.4 per cent and the UK’s FTSE 100 climbed 0.3 per cent.



While the ECB president resisted calls to unveil a programme of government bond purchases, he made clear that quantitative easing remained firmly on the ECB’s table.

“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,” Mr Draghi said.

“With another rate cut, an ABS purchasing programme and a new covered bond purchasing programme, the ECB has now reached a point at which fully-fledged QE, ie outright purchases of government bonds, is the only option left,” said Carsten Brzeski an economist at ING.



Expectations of more monetary action had been high since Mr Draghi acknowledged in late August that markets had started to doubt the ECB’s ability to return inflation back to its target.

At 0.3 per cent, eurozone inflation is at a five-year low. The region’s economy failed to grow at all in the second quarter and, unlike the US and the UK, remains below its pre-crisis peak.

The ECB president said at the Kansas City Federal Reserve’s Jackson Hole symposium that key measures of inflation expectations had started to drift below 2 per cent. He added that the governing council would “acknowledge these developments and within its mandate will use all the available instruments needed to ensure price stability over the medium term”.

On Thursday, the ECB revised its forecast with regard to eurozone inflation and gross domestic product. The central bank foresees annual HICP inflation at 0.6 per cent in 2014, 1.1 per cent in 2015 and 1.4 per cent in 2016. In comparison with the June forecasts, the projection for inflation for 2014 has been revised downwards, while the projections for 2015 and 2016 have remained unchanged.

The ECB now expects the eurozone economy to grow by 0.9 per cent in 2014, 1.6 per cent in 2015 and 1.9 per cent in 2016. The projections for 2014 and 2015 have been revised downwards and the projection for 2016 has been revised upwards.


Fonte: FT