ECB cuts benchmark interest rate to 0.05%

The European Central Bank (ECB) has cut its benchmark interest rate by 10 basis points to 0.05%, and introduced new stimulus measures.

The ECB had earlier cut its rate from 0.25% to 0.15% in June, and also became the first major central bank to introduce negative interest rates.

It will also launch an asset purchase program, which will buy debt products from banks.

It is hoped this move will add liquidity to the financial system and revive lending.

The move falls short of a program of buying government bonds – a process known as quantitative easing (QE), and one which the US Federal Reserve has undertaken.

ECB chief Mario Draghi said that QE had been discussed by the bank.

“Some of our governing council members were in favour of doing more than I’ve just presented, and some were in favor of doing less,” he said.

“So our proposal strikes the mid-road…. a broad asset purchase program was discussed, and some governors made clear that they would like to do more.”

The ECB has been under pressure to kick-start the eurozone economy, as manufacturing output has slowed and inflation has fallen to just 0.3%.

Referring to one element of the new stimulus program, the purchase of asset-backed securities (ABS), Mario Draghi said: “The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase program.

“This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter.”

Mario Draghi also gave an update on the ECB’s forecasts for the eurozone economy.

The new predictions warned of slower growth, of 0.9% in 2014, and of 1.6% in 2015.

Meanwhile the forecast for inflation was cut to 0.6% rising to 1.1% in 2015, and well short of the ECB’s target of close to, but below, 2.0%.

After the latest news was announced the euro fell to $1.2996, the lowest since July 2013 and the first time it has fallen below $1.30 since then.

As was the case after the ECB’s last rate cut in June, Mario Draghi again said that cuts had reached “the lower bound”.

The main benchmark refinancing rate determines what banks pay the ECB for credit, and affects what banks charge companies to borrow.

The central bank also cut its deposit rate, what banks pay to keep their money at the central bank, to minus 0.2% from minus 0.1%.

It is hoped that this measure will encourage banks to lend to business, rather than sit on their cash.

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