• Sun
  • Dec 28, 2014
  • Updated: 2:30pm
BusinessBanking & Finance

ECB takes rates negative in battle against low inflation

PUBLISHED : Friday, 06 June, 2014, 12:38am
UPDATED : Friday, 06 June, 2014, 12:38am

The European Central Bank launched a raft of measures yesterday to fight low inflation and boost the euro-zone economy, cutting interest rates, imposing negative rates on its overnight depositors and offering banks new long-term funds.

The ECB cut all its main rates to record lows in a drive to fight off the risk of Japan-like deflation and bring down the euro's exchange rate. For the first time, it will charge banks 0.1 per cent for parking funds at the central bank overnight.

It stopped short of large-scale asset purchases, or quantitative easing, but ECB president Mario Draghi said more action would come if necessary.

Draghi outlined a four-year €400 billion (HK$4.22 trillion) scheme giving banks that have been holding back credit due to looming stress tests an incentive to increase lending to businesses.

"Now we are in a completely different world," he said, citing "low inflation, a weak recovery and weak monetary and credit dynamics".

The package, adopted unanimously, would increase lending to the real economy, he said.

Other steps included extending the duration of unlimited cheap liquidity for euro-zone banks, injecting about €170 billion by stopping tenders that withdrew funds spent on past government bond purchases, and preparing for possible future purchases of asset-backed securities to support small business.

Projections published by the ECB showed inflation would be just 0.7 per cent this year, 1.1 per cent next year and 1.4 per cent in 2016, a downward revision and far below the ECB's target of below, but close, to 2 per cent.

"If required, we will act swiftly with further monetary policy easing," Draghi said.

The euro fell to a four-month low of US$1.3505, down about 1 US cent, after his statement. European shares rose and yields on the government bonds of stressed euro-zone countries fell.

French President Francois Hollande backed the decision, but German Finance Minister Wolfgang Schaeuble said low interest rates were not a solution.

Economist Hans-Werner Sinn of the Ifo institute said: "This is a desperate attempt, with ever cheaper money and penalty rates on deposits, to shift capital flows to southern Europe."

The ECB lowered the deposit rate to minus 0.1 per cent. It cut its main refinancing rate to 0.15 per cent, and the marginal lending rate to 0.4 per cent.

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