ECB moves deposit rate into negative territory for the first time

Thursday 05 June 2014 21.52
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ECB cuts key benchmark interest rate to 0.15% from 0.25%
ECB cuts key benchmark interest rate to 0.15% from 0.25%
ECB President Mario Draghi says moves will support lending to the real economy
ECB President Mario Draghi says moves will support lending to the real economy

The European Central Bank launched a raft of measures today to fight low inflation and boost the euro zone economy, cutting rates, imposing negative interest 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% for parking funds at the central bank overnight.

The bank lowered the  interest rate on its deposit facility to -0.1% from 0%, while it cut its main refinancing rate to 0.15%, and the marginal lending rate - or emergency borrowing rate - to 0.4%.

Economists polled by Reuters had expected a bigger cut in the refinancing rate to 0.1% from 0.25%.

Nearly 400,0000 people in Ireland are on tracker mortgages and will stand to gain from the interest rate cut to 0.15%. The monthly cost of servicing a €100,000 tracker mortgage will fall by about €6.

The ECB today stopped short of large-scale asset purchases known as quantitative easing for now, but ECB President Mario Draghi said more action would come it necessary.

Draghi outlined a four-year €400 billion scheme giving banks that have been holding back credit due to looming stress tests an incentive to increase lending to businesses in the euro zone. 

"Now we are in a completely different world," Draghi told a news conference, citing "low inflation, a weak recovery and weak monetary and credit dynamics".
              
The package, adopted unanimously, was aimed at increasing lending to the "real economy", the ECB President 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 on past government bond purchases, and preparing for possible future purchases of asset-backed securities to support small business. 

The ECB President also said today that he does not believe that the euro area is on the brink of a period of deflation.

"We don't see deflation. We don't see that typical feature of self-fulfilling deflation expectations, we don't see household postponing purchase plans," Draghi told today's news conference.

Projections published by the ECB showed inflation would be just 0.7% this year, 1.1% next year and 1.4% in 2016, a downward revision and far below the ECB's target of below-but-close-to 2%.
              
"If required, we will act swiftly with further monetary policy easing," he said, adding that the policy-setting Governing Council was unanimous in its commitment to use unconventional instruments if needed "to further address risks of too prolonged a period of low inflation".
              
Financial markets saluted the ECB measures, even though most of them had been widely anticipated for weeks. The euro fell to a four-month low of $1.3505, down about one cent, after Draghi's statement. European shares rose and yields on the government bonds of stressed euro zone countries fell.

Mario Draghi said interest rates would stay low for a prolonged period but after today's cut, he omitted a previous regular line that they could go lower. 

Asked how long it would take for the measures to work their way though into the economy, he said: "Most likely we will see immediate effects in the money markets and we will see delayed effects in the real economy attributable to this programme - it will probably take three or four quarters."
              
The ECB lowered the deposit rate to -0.1%. It cut its main refinancing rate to 0.15%, and the marginal lending rate - or emergency borrowing rate - to 0.4%.
              
Economists polled by Reuters had expected a bigger cut in the refinancing rate to 0.1% from 0.25%.
              
Just hours before the ECB policy decision, a Bank of Japanpolicy maker sounded a warning, saying the euro zone should not take lightly the potential danger of slipping into a Japan-style deflationary period.
              
In a speech in April, Draghi had set out three broad scenario sfor ECB policy action and included the possibility of a broad-based asset-purchase programme in the event of a worsening of the medium-term inflation outlook. 

Euro zone inflation has been stuck in what Draghi has called "the danger zone" below 1% since October, mainly because of weaker commodity and food prices, but also because of wage and other adjustments in euro zone crisis countries. 

At the same time, record low interest rates are still not feeding through evenly to companies across the currency bloc. Companies in Portugal, for example, are paying on average 5.4% on loans compared with 2.2% in Finland or France.
              
This particularly affects smaller companies, which rely strongly on bank funding and make up the bulk of the economy

As expected, the Bank of England left UK benchmark interest rate at 0.5% earlier today, its level since the worst of the financial crisis more than five years ago.

Key quotes from Mario Draghi's statement:

"First, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 10 basis points to 0.15% and the rate on the marginal lending facility by 35 basis points to 0.40%. The rate on the deposit facility was lowered by 10 basis points to -0.10%. These changes will come into effect on 11 June 2014. The negative rate will also apply to reserve holdings in excess of the minimum reserve requirements and certain other deposits held with the Eurosystem.

Second, in order to support bank lending to households and non-financial corporations, excluding loans to households for house purchase, we will be conducting a series of targeted longer-term refinancing operations (TLTROs). All TLTROs will mature in September 2018, i.e. in around 4 years. Counterparties will be entitled to borrow, initially, 7% of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014. Lending to the public sector will not be considered in this calculation. The combined initial entitlement amounts to some €400 billion. To that effect, two successive TLTROs will be conducted in September and December 2014. In addition, from March 2015 to June 2016, all counterparties will be able to borrow, quarterly, up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a specific period in excess of a specified benchmark. Net lending will be measured in terms of new loans minus redemptions. Loan sales, securitisations and write-downs do not affect the net lending measure. The interest rate on the TLTROs will be fixed over the life of each operation, at the rate on the Eurosystem's main refinancing operations (MROs) prevailing at the time of take-up, plus a fixed spread of 10 basis points. Starting 24 months after each TLTRO, counterparties will have the option to make repayments. A number of provisions will aim to ensure that the funds support the real economy. Those counterparties that have not fulfilled certain conditions regarding the volume of their net lending to the real economy will be required to pay back borrowings in September 2016.

In addition, the Governing Council decided to extend the existing eligibility of additional assets as collateral, notably under the additional credit claims framework, at least until September 2018.

Third, the Governing Council decided to intensify preparatory work related to outright purchases in the ABS market to enhance the functioning of the monetary policy transmission mechanism. Under this initiative, the Eurosystem will consider purchasing simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector, taking into account the desirable changes in the regulatory environment, and will work with other relevant institutions to that effect.

Fourth, in line with our forward guidance and our determination to maintain a high degree of monetary accommodation, as well as to contain volatility in money markets, we decided to continue conducting the MROs as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period ending in December 2016. Furthermore, we decided to conduct the three-month longer-term refinancing operations (LTROs) to be allotted before the end of the reserve maintenance period ending in December 2016 as fixed rate tender procedures with full allotment. The rates in these three-month operations will be fixed at the average rate of the MROs over the life of the respective LTRO. In addition, we decided to suspend the weekly fine-tuning operation sterilising the liquidity injected under the Securities Markets Programme."