The European Central Bank (ECB) has announced new measures aimed at stimulating the eurozone economy, including negative interest rates and cheap long-term loans to banks.
The ECB cut its deposit rate for banks from zero to -0.1%, to encourage banks to lend to businesses rather than hold on to money.
It also cut its benchmark interest rate to 0.15% from 0.25%.
The ECB is the first major central bank to introduce negative interest rates.
It has been tried before in smaller economies. Sweden and Denmark, who are both outside the Single Currency, attempted to use negative rates in recent years with mixed results.
Analysts said in Sweden it had little discernible impact; in Denmark it did have the effect of lowering the value of the currency, the Krone, but according to the Danish Banking Association it also hit the banks’ bottom line profits.
The ECB’s president, Mario Draghi, also announced other measures.
Long term loans are to be offered to commercial banks at cheap rates until 2018. These loans would be capped at 7% of the amount that the individual banks in question lend to companies. Thus, the more the banks lend to companies, the more money they can borrow cheaply from the ECB.
The ECB cut its benchmark interest rate to 0.15 percent from 0.25 percent
It is also doing preliminary work that could lead to buying bundles of loans that are made to small businesses in the form of bonds. This is being seen as a step towards providing companies with credit through the financial markets.
Mario Draghi said the ECB’s policymakers unanimously agreed to consider more unconventional measures to boost inflation if it stays too low. The ECB stopped short of instituting a large asset-buying program like the quantitative easing (QE) undertaken by the US Federal Reserve. However. Mario Draghi insisted that more would be done, if necessary.
“Are we finished? The answer is no. We aren’t finished here. If need be, within our mandate, we aren’t finished here.” he said.
Mario Draghi said that the whole package of measures was aimed at increasing lending to the “real economy”.
“Now we are in a completely different world,” he said.
Even though some of the measures, like the more to negative rates on deposits, were expected European shares moved higher on the ECB announcement.
The benchmark German DAX 30 index jumped above the 10,000 level for the first time. The CAC 40 in Paris was up 0.8% shortly after the ECB’s comments.
Meanwhile, the euro fell to $1.3558, its lowest level in four months.
Although the danger of deflation in the eurozone is limited, the ECB is concerned that growth is very sluggish and bank lending weak – both of which could potentially derail the fragile economic recovery.
The eurozone economy grew by just 0.2% in the first quarter of the year. Consumer spending, investment and exports are all growing at a slower pace than this time last year.
Inflation in the eurozone fell to 0.5% in May, down from 0.7% in April. This is well below the European Central Bank’s target of just below 2%.
If the eurozone slips into deflation, the fear is that consumers might spend even less because they would expect prices to fall in future months. For the same reason investors could stop investing.
Growth would then be hit and demand would be severely constrained. The large debts amassed by the eurozone’s countries, companies and banks would take longer and be harder to pay off.
Unemployment, which is already at nearly 12% in the eurozone, and much higher in places like Spain, Portugal and Greece, could get even worse.
Mario Draghi emphasized that recovery in the eurozone was not just in the hands of the ECB, but also in the domain of the banks and the governments. He said the banks needed to play their part by increasing lending and reforms by national governments should be carried through.
“In order to strengthen the economic recovery, banks and policy-makers in the euro area must step up their efforts. Banks should take full advantage of this exercise to improve their capital and solvency position, thereby contributing to overcome any existing credit supply restriction that could hamper the recovery.”
“At the same time, policymakers in the euro area should push ahead in the areas of fiscal policies and structural reforms,” he added.
The central bank of Australia has cut its benchmark interest rate to a new record low, in an attempt to spur a fresh wave of economic growth.
The Reserve Bank of Australia (RBA) cut its key rate to 2.5% from 2.75%.
Last week, the government cut its growth forecasts and warned that unemployment in the country could rise amid slowing growth.
The rate cut comes just days after PM Kevin Rudd called a general election for September 7.
The state of the economy is expected to be a key poll issue, along with asylum and climate change.
Treasurer Chris Bowen welcomed the move, saying that “the fact is that now, under Labor, interest rates are at record lows”.
“This cut means that a family with a standard mortgage of A$300,000 [$269,500] will now be paying around $A500 less a month and A$6,000 less in annual payments than when the Coalition was last in office,” Chris Bowen was quoted as saying by the Australian Broadcasting Corporation (ABC).
The Reserve Bank of Australia cut its key rate to 2.5 percent from 2.75 percent
However, the opposition targeted the Labor party government’s economic policies.
“There is no doubt that a reduction in interest rates is a good thing, but you have to ask yourself why are interest rates likely to be cut,” opposition Leader Tony Abbott was quoted as saying by the ABC, ahead of the rate decision.
“If interest rates go down, it is because this government is presiding over an economy which is in much more trouble than government has previously been prepared to admit.”
Australia’s economic growth over the past few years has been powered mainly by the success of its resources sector.
Demand from countries such as China resulted in a commodities boom, which helped the country sustain its growth even through the global financial crisis.
However growth in those economies has slowed recently, driving down demand for commodities as well as their prices.
That led to the government lowering its forecast for growth. On Friday, it said that it now expected the economy to grow by 2.5% in the current financial year, down from its previous projection of 2.75%.
Analysts said that the slowdown in growth is likely to prompt the central bank to lower borrowing costs even further in an attempt to ease the burden on businesses and consumers.
“The economy’s probably slowed down a little bit more than they would have liked,” said Michael Turner a strategist with RBC Capital Markets.
“So they’re kind of playing catch-up a tiny bit, you would suggest.”
Michael Turner added that he expects the central bank to cut rates by another 25 basis points in the last quarter of the year.
The European Central Bank (ECB) has decided to cut its benchmark interest rate to a new record low amid ongoing worries about the eurozone’s economy.
The widely-expected cut to 0.50% from 0.75% is the first in 10 months.
Worries about eurozone economies were underlined on Thursday with data showing manufacturing activity across the 17-nation bloc shrank in April.
In Germany, the eurozone’s biggest economy, manufacturing contracted for the second month running.
Official data released on Tuesday showed record high unemployment in the eurozone, and inflation at a three-year low.
Ahead of the ECB’s announcement, many economists were forecasting that lower interest rates were likely, but said the fresh data released this week made the case for a cut even stronger.
ECB president Mario Draghi told a news conference that “weak economic sentiment has extended into the spring of this year.”
“Inflation expectations in the euro area continue to be firmly anchored.”
ECB has decided to cut its benchmark interest rate to a new record low amid ongoing worries about the eurozone’s economy
“The cut in interest rates should contribute to support a recovery later in the year,” he added.
There are concerns that the ECB’s low interest rates are not feeding through to those economies most in need of a boost, with potential lenders still worried about the economic health of countries such as Greece and Spain.
“Monetary policy stance will remain ‘accommodative’ for as long as needed,” Mario Draghi said.
“We will monitor very closely all incoming information, and assess any impact on the outlook for price stability.”
Mario Draghi said that the ECB was prepared to cut interest rates further should conditions make it necessary. He also said the central bank was “technically ready” for negative deposit rates.
The euro fell sharply on the comments, losing 0.6% against the pound to 84.135p, edging it towards the recent low of 83.98p that it reached on April 26. Against the dollar, the euro fell below $1.31.
In recent months there have been growing calls for European countries to move away from austerity measures, which critics say are stifling growth. Instead there are calls for a greater focus on stimulus measures.
Both French President Francois Hollande and newly-elected Italian Prime Minister Enrico Letta have urged a reconsideration of austerity policies.
On Thursday, European Council President Herman Van Rompuy said governments must take immediate action to promote growth and the creation of jobs because patience with austerity measures is wearing thin in some countries.
“Taking these measures is more urgent than anything,” he told a conference in Portugal.
“After three years of firefights, patience with austerity is wearing understandably thin.”
A cut in interest rates lowers the costs for troubled banks that have taken emergency loans from the ECB, and could help them repair their finances so they can improve lending. But analysts were divided over whether the cut would have much of an impact.
Purchasing Managers’ Index (PMI) on Thursday highlighted the problems facing many eurozone countries. The index for Germany’s manufacturing sector, which accounts for around a fifth of the economy, fell to 48.1 in April from 49 in March. A reading below 50 indicates contraction.
And in France, Italy and Spain, the eurozone’s next three biggest economies, the PMI data also revealed contractions in manufacturing activity.
For the 17-nation eurozone bloc as a whole, the PMI index fell to 46.7 last month, from March’s 46.8.
“There is nothing here to suggest that manufacturing will turn the corner and stabilize any time soon, putting greater onus on policymakers to act quickly to reinvigorate growth,” said Chris Williamson, chief economist at Markit, which collates the PMI figures.
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