European Bank reveals stimulus plan
The European Central Bank has announced it will start a new stimulus programme that involves buying financial assets to salvage a weak economic recovery.
In a press conference after the ECB cut two key rates, President Mario Draghi said the bank would start purchasing asset-backed securities and covered bonds in October.
Asset-backed securities are based on investments such as loans to companies and mortgages. Buying them would stimulate the market for such bonds and for banks to make the loans that make up the assets.
The news pushed the euro down to 1.2995 dollars (€1), its first time below 1.30 dollars since July 2013.
The measures fall somewhat short of some expectations that the ECB would go for a programme buying government bonds, similar to what the US Federal Reserve has undertaken.
The moves aim to make credit cheaper at a time when concerns are growing that the economy of the 18-country eurozone might go into reverse. It did not grow in the second quarter, raising fears of a triple-dip recession.
To reflect the downbeat outlook, the ECB cut its growth forecast for 2014 to 0.9% from 1.0% previously. It lowered its inflation forecast for the year to 0.6% from 0.7%.
Earlier, the ECB said it had trimmed its benchmark interest rate to 0.05% from a previous record low of 0.15%.
The benchmark refinancing rate determines what banks pay the ECB for credit. It influences what banks charge businesses and consumers to borrow.
The ECB also cut its deposit rate – what banks pay to keep their money at the central bank – to minus 0.2% from minus 0.1%. The negative rate is an effort to push banks to lend money by imposing a financial penalty for hoarding it in the safety of the ECB’s accounts.
Lower rates stimulate more lending and growth. However, lower rates become less effective as a stimulus tool as they approach zero. That is why the ECB is also looking at further measures to boost credit to businesses.
