Rates slashed to record low and could go further
EUROPEAN Central Bank boss Mario Draghi is prepared to slash interest rates even further in a bid to stimulate the ailing Eurozone economy, after cutting rates to a record low.
The ECB reduced its main refinancing rate by 0.25 percentage points to just 0.5 per cent yesterday, following a recent drop in inflation combined with ongoing recession and climbing unemployment.
The move was widely expected, yet Draghi went further than anticipated by twice refusing to deny that rates could be cut even more.
The single currency tumbled during Draghi’s press conference, as the central bank president appeared to open the door to negative deposit rates.
“There are several unintended consequences that may stem from this measure,” Draghi said of a negative deposit rate, while adding that the ECB is “technically ready” for such a measure. “We will address and cope with these consequences if we decide to act. And we will again look at this with an open mind and we stand ready to act if needed.”
When asked if the main rate could come down below 0.5 per cent, Draghi repeated that the bank would “stand ready to act if needed”.
Investors reacted strongly to his comments, sending the euro down around one per cent against the dollar, well below $1.31. And German bund futures, typically seen as a safe haven, hit a new record high.
Draghi also used his speech to insist that Eurozone member states do not row back on their pledges to cut deficits and implement structural reforms to make their economies more competitive.
“In order to bring debt ratios back on a downward path, euro area countries should not unravel their efforts to reduce government budget deficits,” Draghi said in his speech.
Responding to arguments that austerity is responsible for restraining growth, Draghi said that states have been too keen to raise taxes.
“I always say that it is much better to consolidate by reducing current government expenditure, rather than via a contraction in expenditure in infrastructure or investments, or raising taxes,” Draghi said.
THE ECB’S MAIN THREE INTEREST RATES EXPLAINED
The ECB’s most widely-observed rate, its main refinancing operation, feeds liquidity into the banking system – typically with a maturity of a week. Its rate is now at 0.5 per cent. The ECB also cut its rate of the marginal lending facility by 0.5 percentage points to one per cent – it provides this overnight lending facility to banks that sometimes require it as an alternative to borrowing from the markets. It has been known as emergency borrowing, and has peaked at times of high financial sector tension. Finally, the deposit facility – with a rate of zero per cent – is a facility for banks to use when they want to drop surplus liquidity into a central bank overnight.