Tuesday

31st May 2016

Draghi cuts interest rate, launches new stimulus measures

  • The ECB revised down its projections for the eurozone economy, forecasting annual growth of 0.9 percent in 2014 (Photo: Fotolia)

The European Central Bank has cut interest rates to a historic low and unveiled a raft of bond-buying programmes to stimulate lending, in a move that surprised financial markets and analysts.

The Frankfurt-based bank cut the eurozone's basic interest rate by 0.1 percent to 0.05 percent on Thursday (4 September) and its other interest rates by 0.1 percent across the board.

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It will also launch an asset purchase programme to buy debt products from banks starting after the next meeting of its governing council meeting on 2 October.

However, it shied away from a fully-fledged programme of buying government bonds, known as quantitative easing.

Speaking at a press conference following the ECB's monthly governing council meeting, Mario Draghi said that the measures would support the provision of credit to businesses.

The programmes would have "a sizeable impact on our balance sheet", Draghi said, adding that giving a precise estimate of how much it would cost the bank was "very, very complicated"…the aim is to increase the measures that produce credit easing

The ECB's measures comes as EU policymakers again find themselves under intense pressure to stave off a spiral of economic stagnation, high unemployment and very low inflation across the eurozone. The eurozone economy has grown by a mere 0.2 percent in the first six months of 2014, while inflation hit a new low of 0.3 percent in August.

But Draghi reiterated that governments should not rely on the ECB, which also launches a new four-year programme of cheap loans for banks this month, to provide all the stimulus measures to prop up the eurozone economy.

"There are three instruments for revamping growth: structural reforms, fiscal and monetary policy," he noted.

But the ECB's national representatives, who sit alongside the Bank's six executive board members on the governing council, are far from united.

Draghi conceded that the rate cuts had been agreed by "a comfortable majority" but were not unanimous, adding that a quantitative easing programme had been discussed.

"Some governing council members were in favour of doing more and some less," he said, describing the package agreed as "a middle road".

The euro swiftly fell to its lowest rate against the US dollar on the news. A weaker exchange rate could make it easier for EU countries to increase exports.

The ECB has "emptied its toolbox almost entirely", said ING chief economist Carsten Brzeski. "The ECB has now reached a point at which fully-fledged QE is the only option left."

For his part, Roberto Gaultieri, chairman of the Parliament's economic affairs committee, welcomed the move as "good news especially for small businesses", although he added that "I am convinced that the ECB will have to revisit the debate on larger-scale measures before too long".

The ECB also revised down its projections for the eurozone economy, forecasting annual growth of 0.9 percent in 2014, followed by a 1.6 percent expansion in 2015 and 1.9 percent in 2016.

Meanwhile, its annual inflation rate was also lowered, with Draghi forecasting that it would be 0.6 percent in 2014, before gradually increasing to 1.1percent in 2015 and 1.4 percent in 2016.

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