FRANKFURT, Sept 04 (AFP): The European Central Bank surprised financial markets on Thursday by paring back its key interest rates to new all-time lows to ward off deflation, and it also cut growth forecasts.
The news sent the euro down by more than a cent against the dollar to the lowest level in 13 months.
The head of the ECB, Mario Draghi, also said at a later press conference that the bank would launch a programme to purchase asset-backed securities, a major policy development which the markets had expected.
The bank would launch further measures if needed to ward off the threat of deflation, he assured, while also revealing that the bank had cut its eurozone growth forecasts for this year and next.
Against a background of growing concern that the single currency area is on the verge of dangerous spiral of falling prices, the ECB cut its central "refi" refinancing rate to 0.05 per cent from 0.15 per cent.
It also lowered the deposit rate to minus 0.20 per cent from minus 0.10 per cent and trimmed its marginal lending rate to 0.30 per cent from 0.40 per cent, it said in a statement.
Few analysts had expected any further rate cuts this month, arguing that, with eurozone borrowing costs already at record lows, a cut would not prove particularly effective.
Many observers had expected the ECB to embark on a policy of what is known as "quantitative easing" or "QE", a radical policy-already used by other central banks such as the US Federal Reserve-of buying securities on a big scale to inject cash into the economy.
But they said it might opt for a narrower scheme of asset-backed securities (ABS) purchases.
The pressure has increased on the ECB to act after eurozone inflation slowed to just 0.3 per cent in August from 0.4 per cent the previous month.
The latest data puts inflation worryingly below the central bank's target of just under 2.0 per cent and brings the single currency area perilously close to deflation.
This is a climate of falling prices which can cause businesses and consumers to delay purchases, further reducing demand and prices and pushing up unemployment.
But there is resistance to QE because it would entail the ECB buying up sovereign bonds, which many critics-including the German central bank or Bundesbank-view as monetary financing, or printing money to pay a country's debt.
And the ECB is expressly forbidden from doing that.
ECB watchers felt the additional rate cuts were therefore a way for the central bank to duck a programme of QE for now.
ECB in surprise rate cut to avert deflation
FE Team | Published: September 05, 2014 00:00:00 | Updated: November 30, 2026 06:01:00
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