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ECB ready to enter uncharted waters as bank cuts interest rate to fresh low of 0.5pc

The ECB's decision to cut its main interest rate to a record low of 0.5pc from 0.75pc was widely expected by economists, and came amid signs that the eurozone crisis is still hurting the real economy. The marginal lending rate, used as a last resort for banks unable to obtain funding in the wholesale market, was also cut by 50 basis points to 1pc.

Mr Draghi said the bank was also "technically ready" to introduce a negative overnight deposit rate - held at zero on Thursday - which would mean banks would have to pay the ECB to hold money there overnight.

Such a move would be aimed at getting eurozone banks to lend to each other and the wider economy, although Mr Draghi admitted that there were "several unintended consequences" that could arise from introducing this 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," he said on Thursday.

The euro fell almost two cents from its intra-day high against the dollar to $1.3037 following Mr Draghi's comments. "Acknowledging for the first time that the Governing Council was willing to cope with any adverse consequences from negative rates [...] served as a 'verbal intervention' to put downward pressure on the euro," said Scott Thiel, head of global fixed income at BlackRock.

Others said introducing negative rates would be a sign of "desperation" by the central bank. Marc Ostwald, a strategist at Monument Securities, even compared it to the raid on Cyprus deposits.

"Cyprus was an outright bail-in of depositors, but if we get to the process of turning deposit rates at the ECB negative then that will feed through to the banking sector, and asking simple depositors to pay for the honour of putting their money with the bank is effectively bailing those depositors in," he said.

Mr Draghi admitted in March that introducing negative rates would take the central bank into "uncharted waters". European banks parked a total of 120.8bn (101.6bn) with the ECB on Wednesday night, ECB data show, although this is well below the record 827.5bn seen just after the second tranche of the ECB's 1 trillion longer term refinancing operation (LTRO) was paid out.

Mr Draghi said the decision to cut the benchmark rate for the first time since last July was not unanimous, with at least one policymaker calling for a cut of 0.50pc or more and at least one voting for no change.

Mr Draghi vowed to keep eurozone interest rates low "for as long as needed" and extended the ECB's commitment to provide unlimited liquidity to struggling banks until "at least July 2014".

"There can't be fears of lack of funding as an excuse for not lending," he said.

The ECB also said it was exploring ways to help credit-starved small and medium-sized businesses. Giada Giani, an analyst at Citigroup, said the ECB's room for manoeuvre on credit easing for firms remained "very limited".

"The only extra information Draghi provided was that the new tool, if and when finalised, will be a joint effort between the ECB and other European institutions (EIB most likely) and it will focus on promoting the use of asset back securities backed by business loans. Draghi did not sound very optimistic about the possibility of getting anything concrete any time soon in this respect," she said.

Mr Draghi stuck with the ECB's forecast that economic recovery will take hold later in the year but highlighted "downside risks" to that position.

"Weak economic sentiment has extended into the spring of this year," said Mr Draghi "Our monetary policy stance will remain accommodative for as long as needed."

Official figures this week showed that eurozone unemployment hit another record high of 12.1pc in March while inflation fell to a three-year low of 1.2pc in April. The slowdown, driven by a sharp fall in energy prices, means inflation in the eurozone is now at its lowest level since February 2010, and well below the ECB's 2pc target.

[Source: By Szu Ping Chan, The Telegraph, London, 02May13]

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small logoThis document has been published on 03May13 by the Equipo Nizkor and Derechos Human Rights. In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes.