THE EUROPEAN Central Bank (ECB) cut rates again yesterday, pushing one of its main policy tools into negative territory for the first time ever, as president Mario Draghi hinted at even more easing.
With the deposit rate cut from zero to minus 0.1 per cent, Eurozone banks effectively must pay the central bank to park deposits there.
The ECB admitted that it had now exhausted the use of interest rates to ease policy, leaving only unconventional measures. Draghi’s comments on the Bank’s next steps hinted again at a full quantitative easing programme.
“For all the practical purposes we have reached the lower bound… We’ve done this, we think it’s a significant package. Are we finished? The answer is no. If needs be, if [within] our mandate, we aren’t finished.”
Draghi has previously used the same line that rates would “remain at present or lower levels for an extended period of time”, referring to the ECB’s forward guidance. This month, the statement was changed to remove the words “or lower”.
A programme of targeted long-term refinancing operations (TLTROs), the Eurozone’s version of Funding for Lending, was also announced. Banks will be able to borrow the equivalent of seven per cent of their loans to private non-financial firms in the euro area.
The ECB once again cut its forecasts for inflation, suggesting prices will rise by just 0.7 per cent this year, 1.1 per cent in 2015 and 1.4 per cent in 2016.
As the announcements were made, Germany’s Dax index hit an all-time high above 10,000, yet closed at 9,947.83.
The euro plunged as Draghi spoke, but later rose to above the previous day’s closing level.