Tuesday

21st Aug 2018

ECB steps in, vows help 'as long as needed'

  • The ECB governing council met in Bratislava (Photo: Vlado Benko)

The European Central Bank on Thursday (2 May) lowered its key interest rate to a record low of 0.5 percent and vowed to take more action "if necessary", in a move aimed at alleviating recession and unemployment in the eurozone.

The governing council comprising of central bank chiefs from all 17 euro countries had a "very very strong prevailing consensus towards an interest cut," ECB chief Mario Draghi said in a press conference.

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It is the first time in 10 months the key interest rate has been slashed, from 0.75 percent to a historic low of 0.5 percent.

Draghi also signalled that the interest rate for parking money overnight at the ECB, currently kept at zero, may be slashed in the future, meaning banks would have to pay if they hold the money there instead of lending it to each other or to companies.

"We stand ready to act if needed," Draghi said in reference to potential negative interest rates.

The Italian banker explained that the rate cut "should contribute to support prospects for a recovery later in the year" and vowed to keep an "accommodative" monetary policy "for as long as needed."

With inflation having dropped to 1.2 percent in April, well below the two-percent threshold the ECB has to maintain, the governing council had no excuse to not lower the interest rate.

But Draghi also said governments should not abandon structural reforms and continue shrinking their budget deficits.

"Furthermore, they should maintain the momentum towards a genuine economic and monetary union, including the swift implementation of the banking union," he said.

Slow or "insufficient" reforms in the euro area can "dampen confidence and thereby delay the recovery," Draghi warned.

His recipe for fighting the economic gloom while keeping lean budgets and not piling on more debt is to lower taxes: "Now that there is more time, there could be a shift towards reducing current government expenditure and lowering taxes."

What governments should not do is to expect the ECB to "supplement" them for their lack of reforms or to clean up the balance sheets of troubled banks.

Not everyone was happy with the rate cut. According to the Financial Times, German ECB board member Joerg Asmussen voted against the move. And Chancellor Angela Merkel last week said a rate cut may be in the interest of weaker economies in the eurozone, but Germany would need a rate increase, "because savings are currently losing value."

Draghi downplayed her comment and said it merely reflects the difficult situation the ECB is in - making one policy for 17 different 17 countries.

"So, the monetary policy measures which can benefit some countries may not benefit others. Given the weakness that also extends to the core economies, we think it does benefit everybody," he said.

German banks and insurance companies, meanwhile, have formed a "grand coalition for savers" against the ECB and its low interest rates, Sueddeutsche Zeitung reports.

"[German] depositors shouldn't be permanently drawn into solidarity payments for Europe without being asked," said the head of German Sparkassen association, Georg Fahrenschon.

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The German Constitutional Court is on Tuesday to hear from opposing camps about the legality of ECB bond-buying and other anti-crisis measures.

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