Trying to boost a weak economic recovery and head off deflation, the European Central Bank has cut the cost of borrowing.
Bank President Mario Draghi has announced its benchmark interest rate will go down from 0.25 percent to 0.15 percent from June 11.
It has also told the region’s commercial banks that they will not get paid any interest when they leave money on deposit with the ECB – indeed they will have to pay to do that though at a relatively low interest rate of 0.1 percent.
The hope is the move will persuade the banks to lend more to businesses and individuals.
It is the first time the ECB has deployed a negative deposit rate which effectively charges banks to deposit overnight.
The move is a response to a slowdown in inflation far below the ECB’s target and to weak euro zone lending.
The marginal lending rate – or emergency borrowing rate – was cut to 0.40 percent.
The value of the euro against the dollar slipped to a four-month low in response to the ECB’s announcements.
The bank is worried the eurozone could get into a spiral of falling prices with slowing growth and consumption as happened in Japan.
Its fear is that persistently low inflation and weak bank lending could derail the recovery.
“This is a baby rate cut – a tweak to the policy stance,” said RBS economist Richard Barwell, adding that Draghi needed to announce a bundle of measures at his 14.30 CET news conference to avoid disappointing the financial markets.
“I think expectations are very high,” Barwell added. “To exceed them, I think he (Draghi) is going to have to talk up the prospect of asset purchases in the near future.”
Asset purchases – otherwise known as quantitative easing (QE) – involve the central bank printing money to buy bonds, thereby injecting cash into the economy.
with Reuters
