The ECB sees prolonged period of low inflation and will continue LTROs into 2015

European Central Bank (ECB) president Mario Draghi has spoken this afternoon about the ECB's decision to cut its main interest rate from 0.5 per cent to 0.25 per cent. He said that the committee unanimously agreed they needed to act, but there was disagreement as to when.

The committee, he said, judged significant inflation changes since last month, and the move today, he added, strengthens the credibility of the bank's forward guidance.

He stated that there are indications of diminishing inflation rates but that, by and large, the bank doesn't see deflation. He said that some deflation is welcome in certain countries as it reflects rebalancing. Credit dynamics, he says, remain subdued.

Inflation continues to be firmly anchored, said Draghi, and the ECB expects a prolonged period of low inflation, followed by a period of gradual upward movement "towards inflation rates below but close to two per cent later on". So the bank's monetary policy stance will remain accommodative, in order to assist the gradual economic recovery of the Eurozone. The president declined to comment on the potential of the ECB conducting a quantitative easing programme.

The ECB is technically ready to cut the deposit rate, said Draghi. That rate remains currently unchanged.

Interest rates will remain at current levels or lower, however, and the ECB is ready to consider all available instruments that can be activated when the policy rate falls to zero, including negative deposit rates. The bank has decided to continue conducting its long-term refinancing operations (LTROs) until mid-July 2015 at the earliest.

The euro area, said Draghi, should see benefits from the gradual strengthening in demand from exports, but output will continue to recover at a slow pace, owing to gradual improvement in domestic demand.

Draghi ended his statement with a warning that governments in the Eurozone should not ease the pace of reforms.

Kit Juckes, Societe Generale:

As far as policies to revive nominal growth in Europe are concerned, I stand by a view that the ECB simply doesn't have the armoury that is available to the Fed. I would prefer to see the ECB buying a lot of government debt than see LTROs encourage banks to buy government bonds, some of which can happen at the expense of private sector loan growth. Without more credit growth the Euro area will continue to stagnate, especially given the degree of fiscal austerity that is still required by the rules the system lives by. And that is why I think we will see more easing, within the limits of what the ECB can do - starting with another LTRO next year. But I would still describe this as a pea-shooter policy because it would take ECB government bond-buying to constitute 'bazooka'. Still, I have a huge amount of respect for the Draghi regime at the ECB, which started with a surprise rate cut, moved on to the LTRO, shocked us with the 'anything it takes' comment and continues to surprise. He is incredibly imaginative and innovative, even if he is isn't armed with big enough weapons.