Brussels, 04/09/2014 (Agence Europe) - The European Central Bank made a surprise move on Thursday 4 September by deciding to cut interest rates and introduce special measures in the form of the purchase of private securities in order to tackle the threat of even lower inflation in the short term and encourage the financing of the real economy.
The ECB's Governing Council decided to reduce interest rates by 0.1 percent from 10 September for its main refinancing operations (to +0.05%), the marginal loan facility (+0.3%) and the deposit facility (-0.2%). The head of the ECB, Mario Draghi, said it was “not an unanimous decision. But a comfortable majority” had been in favour.
Inflation surprised the ECB by continuing the downward trend in August, falling to 0.3% in the eurozone, largely due to falling fuel prices. The bank has not changed its medium-term forecasts of 0.6% in 2014, 1.1% in 2015 and 1.4% in 2016, the rising downward risks in the short term (geopolitical tensions in Ukraine and not enough reforms in the eurozone) has forced it to introduce new measures alongside the TLTRO operation in June in order to pump cash into the economy. This will start shortly (see EUROPE 11095).
In early October, the ECB will activate a private securities purchase programme. The bank explains: “The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities (ABSs) with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme (ABSPP). In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme (CBPP3)”.
Along with the above decisions that have caused the euro to fall further against the US dollar, the ECB is prepared to use all the means at its disposal to achieve its goal of annual inflation of just under 2%, such as quantitative easing European-style. Draghi was asked whether QE had been discussed at the meeting on Thursday: “Yes, some governors are in favour of doing more, some in favour of doing less. The proposal strikes the mid-road.”
Draghi put pressure on eurozone nations, urging them to step up their structural reforms. He said: “Structural reforms have a cost, but is low growth not a cost in itself?” Draghi warned against any temptation to play around with European budgetary rules in the stability and growth pact, saying that, in order to tackle the “lack of confidence in the future” in the European economy, it would be “better to have first a discussion on structural reforms, then a discussion on flexibility. What I said in Jackson Hole” (see EUROPE 11139). By structural reforms here, he means reforms that favour growth, such as tax cuts that do not affect the budget, and spending cuts in unproductive sectors. Draghi called for a sharing of sovereignty among the member states when it comes to the monitoring of reforms, which he said would have the advantage of facilitating the political process and providing increased opportunities for mobile workers. (MB)