The European Central Bank has surprisingly cut its benchmark interest rate to 0.05 per cent and cut the deposit interest rate to -0.2 per cent and confirmed it will purchase asset-backed securities and covered bonds to fight deflation.
The rate cuts are effective from 10 September and represent a 10 basis point drop in both the headline refinancing and deposit rates and means lenders will pay 0.2 per cent for deposits left with central banks.
Speaking today, ECB president Mario Draghi said the moves had been made in response to falling inflation rate projections in the eurozone.
He added the ABS buys, which begin October, would be “sizeable” but said it was not possible to give an accurate monetary value.
Draghi said: “The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme.
“This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter, as decided by the Governing Council in June. In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by monetary financial institutions domiciled in the euro area under a new covered bond purchase programme.”
The ECB has revised down its inflation projection for 2014 to 0.6 per cent whilst prjections for 2015 and 2015 remained at 1.1 per cent and 1.4 per cent respectively. All remain well below the ECB target of 2 per cent.
Eurozone growth projections have been revised down to 0.9 per cent for 2014, 1.6 per cent for 2015 and 1.9 per cent for 2016.
Interest rates were first brought down to their previous record low in June in an attempt to fight the risk of the eurozone falling into a deflationary cycle.
Last month, the ECB appointed BlackRock to advise on a possible bond-buying scheme as it looks to fight deflation in the eurozone.