ECB Cuts Eurozone Rates And Boosts Stimulus

Written By Unknown on Kamis, 04 September 2014 | 23.31

The European Central Bank (ECB) has taken further action to boost bank lending and spur activity in the stagnating eurozone economy.

A series of rate cuts had an immediate impact with the value of the euro plunging against core currencies, including the dollar and the pound, hitting its lowest level against the greenback since July 2013.

The ECB trimmed its benchmark interest rate to 0.05% from a previous record low of 0.15% and also raised its charge on banks to park money with it - the deposit rate doubling to -0.2% in a bid to encourage banks to lend rather than hoard money.

Then, at a news conference 45 minutes later, ECB president Mario Draghi also confirmed the governing council had decided to start unconventional monetary policy, though it stopped short of quantitative easing.

He said the ECB would start purchasing asset-backed securities and covered bonds in October - a scheme he described as credit easing - which sources told Reuters could amount to €500bn over three years.

Asset-backed securities are created by banks pooling mortgages and corporate, car or credit card loans and sold to insurers, pension funds or now even the ECB.

The idea is the money generated by the banks from the sales could then boost liquidity in the wider economy.

Covered bonds are similar in principle but are protected in the event of a bank collapsing.

The policy moves are a response to a weakening of the eurozone's economic recovery - the most recent figures confirming zero growth across the euro area as a whole, with Germany's GDP actually contracting in the second quarter.

Both business and consumer confidence have been hurt by the continuing row with Russia over Ukraine.

Inflation has also slipped to dangerously low levels in recent months with high unemployment dragging on spending.

Mr Draghi admitted the governing council was split on starting an outright asset purchase programme.

He said: "QE was discussed. Some of our governing council members were in favour of doing more than I've just presented, and some were in favour of doing less.

"So our proposal strikes the mid-road", he explained.

Former Bank of England Monetary Policy Committee member, Andrew Sentance, told Sky News he agreed with many economists that the package could have been stronger - describing the measures as "symbolic".

But he said: "The euro is likely to weaken against the dollar and the pound and that's probably a good thing".


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