European Central Bank hurls cash at euro zone economy, says not done yet

Jun 06 2014, 04:35 IST
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<i>File: </i>A 'Golden Calf' is placed in front of the European central Bank during protests in Frankfurt. (Photo: AP) File: A 'Golden Calf' is placed in front of the European central Bank during protests in Frankfurt. (Photo: AP)
SummaryEuropean Central Bank cuts deposit rate to -0.10 pct, refi rate to 0.15 pct

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".

Most of the measures had been widely anticipated. The euro initially fell to a four-month low of $1.3505 after Draghi's statement before recovering to trade above $1.3600, slightly up on the day. 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 European Central Bank action to weaken the euro's exchange rate, which Paris argues is holding back economic recovery, welcomed the central bank's decision.

The International Monetary Fund, which has also pressed the European Central Bank to take robust action, welcomed Thursday's announcements a "very proactive stance".

German Chancellor Angela Merkel declined comment, noting that the European Central Bank 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 European Central Bank'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.

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. He added that "for all practical purposes" interest rates had reached the bottom.

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."

The European Central Bank lowered the deposit rate to -0.1 percent. It cut its main refinancing rate to 0.15 percent, and the marginal lending rate - or emergency borrowing rate - to 0.40 percent.

Economists polled by Reuters had expected a bigger cut in the refinancing rate to 0.10 percent from 0.25 percent.

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