ECB pulls out all the stops with stimulus boost

The ECB unleashed some of its last remaining stimulus weapons yesterday, cutting all three of its interest rates and expanding asset-buying to boost the eurozone economy and prevent ultra-low inflation becoming entrenched.

It slashed its inflation expectations for this year but also suggested that interest rates would go no lower.

In moves that briefly pushed the euro 1% down against the dollar, the ECB cut its deposit rate deeper into negative territory and increased monthly asset buys to €80bn from €60bn, above expectations of a hike to €70bn.

While the deposit rate was cut 10 basis points to -0.4%, the main refinancing rate was shaved to zero from 0.05% and its marginal lending rate — used by banks to borrow from the ECB overnight — fell to 0.25% from 0.3%.

“Rates will stay low, very low, for a long period of time and well past the horizon of our purchases,” ECB president Mario Draghi, judged to have disappointed markets in December with measures below expectations, told a news conference. Purchases are due to end in March next year.

He added: “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 said it would also start buying corporate debt and launch four new rounds of cheap loan packages, to be extended by banks to the real economy.

Slashing its 2016 inflation forecast from 1% to just 0.1%, the bank said further rounds of ultra-cheap four-year loans to banks could include extra financial sweeteners for them to take up the offer to pass on to others.

“A bank that is very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities,” Mr Draghi said.

“Good news for Europe: Having delivered less than expected in December, the ECB returned to its usual form today and eased policy by a bit more than projected,” said Holger Schmieding at Berenberg bank.

However, others were more critical, warning that such loose monetary policy risked creating asset-price bubbles and removed any incentive for governments to reform their economies.

“What will happen if the global economic situation deteriorates sharply once more, requiring a strong monetary policy response? I do not anticipate this happening, but if it did, the ECB would have already shot most of its powder,” said Michael Menhart, chief economist at German reinsurer Munich Re.

Mr Draghi acknowledged the limitations of negative rates and said any future moves would likely have to focus on other, non-conventional measures. n Reuters