European Central Bank president Mario Draghi stunned markets today as he unveiled a surprise rate cut in a bid to kick-start the eurozone’s flatlining economy.
The latest reduction to the ECB’s main interest rate, taking it from 0.15% to just 0.05%, rocked currency markets, sending the euro plunging more than a cent to a 14-month low against the dollar of $1.3015. The pound strengthened to €1.2590.
The central bank made history in June by charging banks to hold reserves at the ECB in a bid to increase credit conditions.
This charge was increased today as Draghi also cut the deposit rate further into negative territory at minus 0.2%.
ABN Amro economist Nick Kounis said: “The move was a surprise not because it is not warranted but because the ECB had suggested that rates would not go down further as it would focus on other policy measures.”
The drastic moves come after depressing growth figures from the eurozone, which showed its economy grinding to a halt between April and June.
The single currency bloc is also veering dangerously close to deflation as the inflation rate fell to a five-year low of 0.3% in August, far below the ECB’s target of close to 2%.
Draghi was also poised to give a €500 billion (£399 billion) lift for the eurozone by announcing detailed plans to buy up asset-backed securities — bundles of mortgage, business and car loans made by banks — to boost credit over the next three years, according to reports.
While the move falls short of full-blown quantitative easing, Draghi said at the Jackson Hole symposium in August that plans to buy up asset-backed securities were “fast moving forward and we expect that it should contribute to further credit easing”.
The ECB has been developing such a programme with a view to stimulating the ABS market and offering smaller businesses an alternative source of funding, although bankers and regulators have cast doubt on reviving a debt market shut down by financial crisis.
This month the ECB will launch its version of the Funding for Lending scheme.
The fireworks in Frankfurt contrasted with the expected move from the Bank of England to hold interest rates at 0.5% and keep its money-printing programme unchanged at £375 billion.
