European Central Bank reveals strong stimulus plan

The ECB cuts main interest rate to zero and unveils new measures aimed at encouraging banks to increase lending.

    European Central Bank reveals strong stimulus plan
    ECB chief Draghi said the measures would "reinforce" the momentum of the eurozone economic recovery [Yves Herman/Reuters]

    The European Central Bank has cut its main interest rate to 0 percent from 0.05 percent, in a surprise move aimed at boosting eurozone economies.

    The bank, known as the ECB, said on Thursday that it will expand its asset-buying programme and will increase its monthly bond purchases from €60bn to €80bn ($67bn-$89bn), pushing more newly printed money into the economy.

    The bolder-than-expected stimulus package also included a reduction in the interest rate on deposits held by banks at the ECB to minus 0.4 percent, from minus 0.3 percent.

    The scheme also includes long-term cheap loans of up to four years to help support banks.

    READ MORE: EU central bank raises Greek credit after bailout vote

    Mario Draghi, the ECB president, said the measures would "reinforce" the momentum of the eurozone economic recovery and "accelerate" the return of inflation to close to, but below, 2 percent.

    Yet, European stocks markets closed sharply lower as investors appearred unconvinced by the stimulus measures.

    In Germany, DAX ended the day down by 2.3 percent after initially rising on the ECB announcement, while France's CAC 40 fell by 1.7 percent.

    The euro, which tends to weaken with more stimulus, was 1.6 percent higher at $1.1172, having earlier tanked by 1.2 percent.

    Lending push

    The negative rate on deposits - in essence, a tax on bank's excess funds - is aimed at pushing banks to lend rather than leave money at the central bank.

    More lending would promote growth and push up inflation from a worryingly low annual rate of minus 0.2 percent.

    The rate cut and the other measures to expand stimulus underline how far the ECB sees itself from achieving its goal of inflation of just under 2 percent.

    Low or negative inflation has raised fears that Europe may become stuck in deflation, in which stagnant prices weigh on wages, investment and economic growth for years.

    READ MORE: ECB agrees to pump more cash into Greek banks

    Draghi, judged to have disappointed markets in December with stimulus measures below expectations, said more action was needed because the eurozone recovery risked being dampened by the slow-down in emerging markets.

    "With today's comprehensive package of monetary policy decisions, we are providing substantial monetary stimulus to counteract heightened risks to the ECB's price-stability objective," he told a news conference.

    Yet, Laith Khalaf, senior analyst at stockbrokers Hargreaves Lansdown, said it was hard to see how even lower interest rates and an increase in the bond-buying programme can been seen as a positive development.

    He says that the fact the ECB is "still pursuing such extreme monetary policy paints a depressing picture of the European economy".

    Khalaf added that the markets "are beginning to question what central banks have left in the locker if the global economy slips back towards recession".

    SOURCE: Agencies


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