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The European Central Bank (ECB) on Thursday decided to cut all the interest rates by 10 basis points and start buying non-financial private sector assets.
The interest rates on the main refinancing operations, the marginal lending facility and the deposit facility of the Eurosystem will be decreased by 10 basis points to 0.05 percent, 0. 3 percent and minus 0.2 percent starting from the operation to be settled on Sept. 10, 2014, said an ECB announcement.
The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs) and a broad portfolio of euro-denominated covered bonds issued by Monetary financial institutions (MFIs) domiciled in the euro area under a new covered bond purchase program, according to ECB President Mario Draghi.
Interventions under these programs will start in October 2014. The detailed modalities of these programs will be announced after the Governing Council meeting of Oct. 2.
"The newly decided measures, together with the targeted longer- term refinancing operations which will be conducted in two weeks, will have a sizeable impact on our balance sheet," said Draghi at the press conference following the ECB Governing Council meeting.
Draghi explained that the ECB made the decisions taking into account the overall subdued outlook for inflation, the weakening in the euro area's growth momentum over the recent past and the continued subdued monetary and credit dynamics.
According to Draghi, the measures will support the provision of credit to the broad economy.
"Should it become necessary to further address risks of too prolonged a period of low inflation, the Governing Council is unanimous in its commitment to using additional unconventional instruments within its mandate," said Draghi.
Draghi said last month at the Fed's annual symposium in Jackson Hole, Wyoming that the ECB is willing to push more accommodative monetary policy as the continent suffered stagnant economies.
Expectations of the ECB further easing its monetary policy have been running high while the inflation in the euro area went down to 0.3 percent in August 2014 after 0.4 percent in July.
According to the September 2014 ECB staff macroeconomic projections for the euro area, the annual real GDP will increase by 0.9 percent in 2014, 1.6 percent in 2015 and 1.9 percent in 2016.
Compared with the June 2014 Eurosystem staff macroeconomic projections, the projections for real GDP growth for 2014 and 2015 have been revised downwards and the projection for 2016 has been revised upwards.
Draghi said he secured a comfortable majority in the Governing Council for the decisions and the interest rates reached a lower bound, a statement which he believed could encourage financial institutions to stop waiting for further rate cuts and lend to the real economy.
It is the second time within three months that the ECB has moved to cut rates and come up with monetary easing measures.
Howard Archer at IHS Global Insight, commented that the rate cut decision further showed just how worried the ECB was about very low and still falling eurozone consumer price inflation, weakening inflation expectations and faltering eurozone economic activity.
Christian Schulz, a senior economist at Berenberg Bank, believed that the measures taken by the ECB would help the economy of the eurozone recover.
"I don't think this program is a real turning point, but it is an incremental measure which should help the recovery ...," said Schulz.
According to Hans-Werner Sinn, President of the German economic think tank Ifo, the ECB's surprising interest-rate cuts will have no effect.
"The ECB used up its ammunition much too early and cut interest rates by too much. Now it is in a liquidity trap. At this point, there is not much it can do," said Sinn. Enditem
