European Central Bank eased policy further, hurls cash at sluggish euro zone economy, force bank lending

Jun 06 2014, 14:46 IST
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ECB President Mario Draghi said more action would come if necessary. (AP) ECB President Mario Draghi said more action would come if necessary. (AP)
SummaryThe European Central Bank launched a raft of measures on Thursday to fight low inflation...

The European Central Bank 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 European Central Bank (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 percent 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 if 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.

Other steps included extending the duration of unlimited cheap liquidity for euro zone banks, injecting about 170 billion euros by stopping tenders that withdrew funds spent on on past government bond purchases, and preparing for possible future purchases of asset-backed securities to support small business.

Projections published by the ECB showed inflation would be just 0.7 percent this year, 1.1 percent next year and 1.4 percent in 2016, a downward revision and far below the ECB's target of below-but-close-to 2 percent.

"If required, we will act swiftly with further monetary policy easing," he said, adding that the policy-setting Governing Council was unanimous in its commitment to use unconventional instruments if needed "to further address risks of too prolonged a period of low inflation".

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. European shares rose and yields on the government bonds of stressed euro zone countries fell.

FRANCE HAPPY, GERMANY SILENT

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

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