Financial News

  • 6 June 2014, 12:50

ECB Acts To Halt Euro Deflation Threat

The European Central Bank (ECB) has announced a series of measures to help boost economic growth in the euro area and prevent a spiral into crippling deflation.

The bank's governing council's first monetary policy announcement was a lowering of the benchmark interest rate to a new record low.

The refinancing rate - which is effectively the ECB's base rate of interest used to calculate borrowing rates - was cut from 0.25% to 0.15%.

But of greater interest was confirmation the ECB was to charge banks to deposit cash with it for the first time - aimed at stoking bank lending - with the deposit rate hitting -0.1%.

ECB president Mario Draghi later told a news conference the rates would remain at that level for an extended period of time.

Other measures included an offer for banks to access a targeted long-term refinancing operation (LTRO) to persuade them to lend.

The initial size of the LTRO was put at ?400bn (£3.23bn) and the ECB was also preparing to purchase asset-backed securities.

Mr Draghi said: "In order to strengthen the economic recovery, banks and policymakers in the euro area must step up their efforts.

"Against the background of weak credit growth, the ongoing comprehensive assessment of banks' balance sheets is of key importance.

"Banks should take full advantage of this (LTRO) 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, policy-makers in the euro area should push ahead in the areas of fiscal policies and structural reforms."

Mr Draghi confirmed a downgrade in GDP expectations for the 18-nation eurozone for 2014, with economic growth now forecast at just 1%.

Economists say the biggest threats to recovery in the debt-laden euro area come from banks failing to lend and costs falling.

Tackling the spectre of deflation - or falling prices - is part of the ECB's key mandate.

Deflation is seen as such a threat because it has been proved to stop people or firms from making spending decisions because of the hope prices will be cheaper at a later date - a spiral which has persistently dogged Japan.

There was a positive reaction to the developments on world markets (see the latest moves here), with stocks rising across Europe.

The German DAX hit 10,000 points for the first time at one stage while on the bond markets, government borrowing costs remained largely stable.

The euro - widely seen as overvalued given the nature of Europe's economic problems - fell to a four-month low against the dollar and its lowest level against the pound since December 2012.

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