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ECB slashes key rate to zero

International Business
Fri, 11 Mar 2016

Frankfurt: European Central Bank (ECB) chief Mario Draghi unleashed a bold easing package yesterday, cutting rates and expanding asset buys, but undid the very stimulus he hoped to achieve by suggesting there would be no further cuts.

That comment drove the euro to unwanted gains against the dollar and prompted criticism from some that Draghi, who already in December disappointed markets by under-delivering, had once again botched his communication.

Seeking to resurrect corporate activity and investments, the ECB said it would start buying corporate debt and even offered to pay banks for lending to companies in the ailing euro area in a bid to kickstart growth and stave off the threat of deflation.

The ECB raised monthly asset buys to 80 billion euros ($89.4bn) from 60 billion euros and cut its main refinancing rate to zero from 0.05 per cent. It also cut its deposit rate by 10 basis points to -0.4pc and shaved the marginal lending rate – used by banks to borrow from the ECB overnight – to 0.25pc from 0.3pc.

The bank has sought for three years to push inflation up to its target level, spending 700bn euros on asset buys in the past year alone. But it has been to no avail amid weak investment, high unemployment, high debt and productive slack in the economy.

Draghi announced that ECB staff had slashed its inflation and growth expectations, predicting that even with fresh stimulus, price growth will not reach its target for years to come and growth will slow.

Markets initially cheered the package but reversed course after Draghi hinted the ECB was done cutting rates and ruled out a tiered deposit rate structure – a system of multiple rates already used in Switzerland and Japan to encourage lending to companies while also punishing banks that hold too much cash.

“Rates will stay low, very low, for a long period of time and well past the horizon of our purchases,” Draghi told his regular post-council news conference.

“From today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further.”

The ECB’s move came after the G20 group of the world’s major economies last month agreed they need to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor.