ECB cuts interest rates to combat the threat of deflation.
The European Central Bank cut interest rates to new record lows on Thursday, unexpectedly reducing borrowing costs to near zero in an attempt to lift inflation from record lows and support the stagnant eurozone economy.
By Paul Carrel
FRANKFURT (Reuters) The European Central Bank (ECB) cut interest rates to new record lows on Thursday, unexpectedly reducing borrowing costs to near zero in an attempt to raise inflation from record lows and support the stagnant eurozone economy.
The ECB cut its main refinancing rate to 0,05 percent from 0,15 percent and took its overnight deposit interest rate into even more negative territory, now charging banks 0,20 percent to leave funds at the ECB.
Lower interest rates will make the ECB's future four-year loan offerings, or targeted long-term refinancing operations (TLTROs), more attractive as banks can now obtain the funds for less. However, with lending still weak, the broader impact may be uncertain.
"It was the last chance to do it before the TLTROs, which is probably why they did it," said Nordea analyst Holger Sandte. "It seems a bit like a panic, and it creates a lot of expectation that there's more to come at the press conference."
Marco Valli, an economist at Unicredit, said the cuts will have little impact on the European economy.
"We're talking about a very small cut in interest rates," he said. "They probably want to show that they won't just stay in rhetoric. But this will only help at the margins."
ECB President Mario Draghi is expected to offer a more detailed assessment of the economy during a press conference at 9:30 AM (Brasilia time). Many analysts expect him to also clarify the ECB's plans to purchase securitized loans to ease credit conditions.
Plans to launch a program to buy covered bonds and asset-backed securities (ABS) valued at up to 500 billion euros were being discussed at the ECB's monetary policy meeting on Thursday, people familiar with the discussions told Reuters.
Draghi is expected to announce this program in his press conference unless he encounters strong opposition from the Council at the monetary policy meeting.
The program would last three years and include purchases of both ABS and covered bonds. The ECB could start buying the assets this year, people familiar with the discussions told Reuters.
Markets will also be watching for any clues about a large-scale asset purchase program, or "quantitative easing," which also includes sovereign debt.
"If that's all they do, it's a disappointment for the markets," said Sandte of Nordea.