ECB cuts rates to below zero

Written by Reuters | Frankfurt | Updated: Jun 7 2014, 01:47am hrs
The European Central Bank (ECB) launched a raft of measures on Thursday to fight low inflation and boost the euro zone economy, cutting rates, imposing negative interest rates on its overnight depositors and offering banks new long-term funds. The ECB cut all its main rates to record lows in a drive to fight off the risk of Japan-like deflation and bring down the euro's exchange rate. For the first time, it will charge banks 0.10% for parking funds at the central bank overnight.

It stopped short of large-scale asset purchases known as quantitative easing for now, but ECB president Mario Draghi said more action would come it necessary.

Draghi outlined a four-year 400 billion euro ($544.86 billion) scheme giving banks that have been holding back credit due to looming stress tests an incentive to increase lending to businesses in the euro zone.

Now we are in a completely different world, Draghi told a news conference, citing low inflation, a weak recovery and weak monetary and credit dynamics.

The package, adopted unanimously, was aimed at increasing lending to the "real economy", he said.

The ECB lowered the deposit rate to -0.1%. It cut its main refinancing rate to 0.15%, and the marginal lending rate or emergency borrowing rate to 0.40%.

Draghi said interest rates would stay low for a prolonged period but after Thursday's cut, he omitted a previous regular line that they could go lower. Asked how long it would take for the measures to work their way though into the economy, he said: Most likely we will see immediate effects in the money markets and we will see delayed effects in the real economy attributable to this programme ... It will probably take three or four quarters.

Projections published by the ECB showed inflation would be just 0.7% this year, 1.1% next year and 1.4% in 2016, a downward revision.

Financial markets saluted the ECB measures, even though most of them had been widely anticipated for weeks. The euro fell to a four-month low of $1.3505, down about one cent, after his statement.

French President Francois Hollande, who has been calling for months for ECB action to weaken the euro's exchange rate, which Paris argues is holding back economic recovery, welcomed the central bank's decision.

German Chancellor Angela Merkel declined comment, noting that the ECB took its decisions independently of governments. Her finance minister, Wolfgang Schaeuble, said low interest rates were not a long-term solution.

Low rates are unpopular in Germany, Europe's biggest economy, because they are seen as penalising savers.

Conservative German economist Hans-Werner Sinn of the Ifo institute said the ECB's moves smacked of desperation and would not work.

This is a desperate attempt, with ever cheaper money and penalty rates on deposits, to shift capital flows to southern Europe in order to stimulate growth there, he said.