Euro slides to one-year low as ECB cuts rates to 0.05pc, but confirms stimulus programme

Guy Bentley
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The ECB has defied expectations and cut rates to 0.05pc (Source: Getty)

The euro slid to 1.302 against the dollar, its lowest level since July 2013, after the European Central Bank cut interest rates from 0.15 per cent to 0.05 per cent and confirmed plans to start a programme of buying asset-backed securities.

ECB president Mario Draghi hinted during a speech at Jackson Hole last month that the bank would begin buying repackaged bundles of loans to help stimulate the economy. He added today that the ECB will also launch a covered bond buying programme.

Although Draghi said details of both programmes - which will be launched in October - will be released after the ECB's meeting next month, sources say both programmes are likely to last three years. The program may help to ease credit conditions and maintain price stability in the Eurozone.

Although there had been hopes Draghi would take more of an activist stance, there was significant scepticism given Draghi's keenness to emphasise the success of structural reforms in Spain and Ireland and the need for countries such as France to follow suit.

Earlier today Jeroen Dijsselbloem, the president of the Eurogroup, warned the Eurozone recovery was fragile and that the ECB should not take action to ease monetary policy, but instead encourage governments to speed up structural reforms.

"I believe that recent developments underscore the need to push forward the growth and reform agenda. Fundamental challenges faced by the Eurozone are unchanged," Dijsselbloem said in Brussels.

Many will argue there were ample reasons for action now. Eric Lascelles, chief economist at RBC Global Asset Management, pointed out "swooning inflation expectations, stagnant economic activity and shrinking private-sector credit" all contributed to a need for action.

Howard Archer, chief UK & European economist at IHS Global Insight, commented:

The ECB’s decision to cut interest rates further shows just how worried it is about very low and still falling Eurozone consumer price inflation, weakening inflation expectations and faltering Eurozone economic activity. The ECB has cut its key benchmark refinancing interest rate interest from 0.15 per cent to 0.05 per cent and moving its deposit rate further into negative territory (to -0.20 per cent from -0.10 per cent). Its marginal lending rate has been trimmed to 0.30 per cent.

Here are the three decisions the ECB took today confounding expectations:

1. The interest rate on the main refinancing operations of the Eurosystem will be decreased by 10 basis points to 0.05 per cent, starting from the operation to be settled on 10 September 2014.

2. The interest rate on the marginal lending facility will be decreased by 10 basis points to 0.30 per cent, with effect from 10 September 2014.

3. The interest rate on the deposit facility will be decreased by 10 basis points to -0.20 per cent, with effect from 10 September 2014.

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