The European Central Bank slashed its interest rate to zero for the first time with a dramatic package of stimulus measures.
The ECB also widened the scope and scale of quantitative easing, and offered banks a new, cheap lending facility, as it surprised markets with a plan aimed at lifting the euro zone out of its disinflationary stupour.
The ECB cut its benchmark rate to zero per cent, from 0.05 per cent and its overnight deposit rate to minus 0.4 per cent, from minus 0.3 per cent. Its marginal lending facility rate was cut to 0.25 per cent from 0.3 per cent.
Quantitative easing (QE) will be expanded to €80 billion per month, up from €60bn.
In a dramatic move, the ECB will now buy investment grade Euro-denominated bonds issued by non-bank corporates, in addition to sovereign debt. ECB president Mario Draghi reiterated that QE would continue until inflation was at its target of close to or below 2 per cent.
A novel ECB lending facility, named TLTRO 2, would offer banks new loans with the aim of incentivising real economy credit growth.
Starting in June this year, the ECB will offer euro-zone banks the option to take out new loans with four-year maturities and low rates.
Discounts will be applied if the bank meets criteria indicating that it has stepped up its lending to the real economy.
“With today’s comprehensive package of monetary decisions, we are providing substantial monetary stimulus to counteract heightened risks to the ECB’s price stability objectives,” Mr Draghi said. Because of the likely effects of further falls in oil prices, it is vital to secure the return of inflation to target “without undue delay”, he added.
The euro dropped 1.3 per cent after the ECB’s announcement, before gaining after Mr Draghi said that the bank did not anticipate further cuts to the interest rate.
The ECB is tasked with restoring euro-zone inflation to at or below 2 per cent in the medium term. Euro-zone inflation stood at -0.2 per cent in February 2016, with inflation forecast to be just 0.1 per cent this year, according to ECB forecasts.
Euro-zone growth, at 0.3 per cent in the fourth quarter of the year, remains “weaker than expected”, Mr Draghi said.
“The economic recovery in the euro area continues to be dampened by subdued growth prospects in emerging markets, volatile financial markets, the necessary balance sheet adjustments in a number of sectors, and the sluggish pace of implementation of structural reforms,” Mr Draghi said. “The risks in the euro-zone outlook remain tilted to the downside.”
This comes as the IMF gears up to further downgrade its forecast for global growth. The IMF is likely to trim its 2016 global growth projection of 3.4 per cent this year, Financial Counsellor Jose Vinals said yesterday, according to reports.
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