The European Central Bank delivered more than what markets hoped by cutting its benchmark interest rate to zero and expanding its asset purchases, among other steps, thus braving the risk of further action causing more harm than good for the euro area economy that is battling the prospect of the low energy cost-fueled low inflation getting entrenched amid feeble growth.
The bank also announced a new round of longer-term financing operations and decided to include non-bank debt in its list of eligible assets for purchases.
In its policy session in Frankfurt on Thursday, the 25-member Governing Council lowered its benchmark interest rate, the main refinancing rate, by five basis points to a record low zero percent. Economists had expected the rate to be left unchanged.
The already-negative deposit rate was cut by 10 basis points to -0.40 percent. The decision was in line with economists’ expectations.
The marginal lending facility rate was reduced by five basis points to 0.25 percent. Economists had expected the rate to be held steady.
The new rates will take effect on March 16.
Further, the bank expanded the monthly purchases under the asset purchase programme by EUR 20 billion to EUR 80 billion starting in April. Economists were looking for an increase of at least EUR 10 billion.
The ECB also decided to include investment grade euro-denominated bonds issued by non-bank corporations in the euro area in the list of assets that are eligible for regular purchases.
Additionally, the bank announced a new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years. These will start in June.
Borrowing conditions in these operations can be as low as the interest rate on the deposit facility, the bank said.
ECB President Mario Draghi is set to hold his customary press conference at 8.30 am ET. He is also set to unveil the latest ECB Staff macroeconomic projections that is likely to reveal further downgrade to the Eurozone inflation outlook and initiate forecasts for 2018.
After the December disappointment, Draghi was widely expected to deliver more than he promised.
The central bank chief had strongly signaled after the January meeting that a review of the policy stance was due in March. ECB policymakers’ rhetoric since then have been in line with Draghi’s words and had fed market expectations.
In the run up to the latest meeting, the ECB faced the dilemma of further action causing more harm than good to the 19-nation economy, while inaction threatened to erode the bank’s credibility and weaken inflation expectations.
In February, Draghi said the bank will not surrender to low inflation, adding that he favors acting early than too late.
While Draghi has maintained that there is no limit to what the ECB can do to boost inflation and return growth, markets and economists are increasingly doubtful about the effectiveness of drastic measures.
“The ECB deserves credit for learning from its mistake in December,” Capital Economics economist Jonathan Loynes said.
“But there is no guarantee that its latest “bazooka” will be any more effective than previous ones in securing the strong and sustained growth required to eliminate the threat of deflation in the currency union and allow the peripheral countries to tackle their debt problems. The ECB has belatedly delivered, but it can’t work miracles.”
Over a year ago, Draghi crossed the rubicon to take the quantitative easing route, which ECB’s peers US Federal Reserve and Bank of Japan embraced long back. Despite an extension of the asset purchase programme in December, there is little improvement in the Eurozone growth and inflation outlook, amid the decline in global commodity prices.
Eurozone inflation has been below the ECB’s ‘below, but close to 2 percent’ target since early 2013. In February, prices declined for the first time in five months and at the fastest pace in a year, adding to deflation concerns. More worrying was the weakening of the core inflation figure, suggesting that the cheaper oil prices are feeding into the real economy.
Recent survey data showed that private sector growth is at a 13-month low and economic sentiment is the weakest since June. On the brighter side, retail sales grew and unemployment was the lowest since mid-2011 in January.
The material has been provided by InstaForex Company – www.instaforex.com