The European Central Bank (ECB) has lowered the official eurozone interest rate for a second month running as it battles the region’s worsening economic conditions.
The central bank cut its main policy rate by 25 basis points to 1% at the first meeting chaired by incoming president Mario Draghi. This follows the 25 basis point reduction made in October.
Speaking after the interest rate move, Draghi warned: “The intensified financial market tensions are continuing to dampen economic activity in the euro area and the outlook remains subject to high uncertainty and substantial downside risks.”
He also announced “further non-standard measures” to boost liquidity in the eurozone’s financial system, which are designed to support the provision of credit to households and non-financial business.
The ECB will conduct two longer-term refinancing operations (LTROs) starting on December 21. These LTROs, which have a maturity of 36 months and the option of early repayment after one year, will replace the 12-month LTRO announced on October 6.
In addition, the bank will lower the rating threshold for certain asset-backed securities (ABS) that are used as collateral for its loans. National central banks will be able to temporarily accept bank loans ’that satisfy specific eligibility criteria” as collateral.
The ECB will also lower the reserve ratio from 2% to 1% to free up more collateral and support money market activity.
Due to the ECB’s full allotment policy in main refinancing operations and the way banks are using this option, “the system of reserve requirements is not needed to the same extent as under normal circumstances to steer money market conditions”.
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