Brussels, 07/05/2009 (Agence Europe) - On Thursday 7 May, the European Central Bank (ECB) decided to lower (as from 13 May) interest rates applying to major refinancing operations of 25 base points, to 1%. On the other hand, the deposit facility rate stayed at 0.25% and falls by 50 base points to than of the marginal lending rate at 1.75%. The ECB also broke new ground by deciding on unprecedented “non-conventional” measures, with a view to providing the markets with liquidity and encouraging the banks to pass the lower rates onto households and businesses. All these decisions were taken at unanimity by the board of governors, explained president Jean-Claude Trichet at the end of the meeting. The monetary policy decisions will gradually impact on the economy but Mr Trichet affirmed that once the macro-economic environment has improved, “the measures taken can be quickly unwound and the liquidity provided absorbed”.
Low inflationary pressure explains away the expected lowering in rates, which is perhaps not the last one. Economic data “suggest tentative signs of a stabilisation at very low levels, after a first quarter which was significantly weaker than expected in March”, explained Mr Trichet. Trichet said that this deterioration requires downward revision in the ECB services' forecasts, which will be revealed in June and will be closer to those of the Commission. According to Trichet, “the world economy, including the Euro area, is still undergoing a severe downturn, with the prospect of both external and domestic demand remaining very weak over 2009 before gradually recovering in the course of 2010”. At the same time, the data available on inflation illustrates that the general level of prices should still comply with price stability as defined by the ECB, including that for 2010. Reduced inflationary pressure could be broader than expected (and go beyond the fall in prices for raw materials and energy so far witnessed), explained Mr Trichet. Due to base effects stemming from past energy price movements we expect to see headline annual inflation rates declining further and temporarily remaining at negative levels for some months around mid-year before increasing again.
In addition to its action on interest rates, the ECB has innovated and added new measures into its reinforced lending support approach. It decided to carry out refinancing operations in the longer term (their deadlines are extended to 12 months contrary to the current 6) and will be announced on 23 June. There rates will correspond to the main refinancing rate in force and therefore depend on the next meeting of the governing council on this subject on 4 June. Questioned by the press on a possible rates cut, Trichet left all options open and explained: “We did not decide today that the current level of our rates was the lowest possible level”.
The ECB also made a principled decision to carrying out buyout operations for covered bonds in Euros (securitised loans, mortgage loans and public authority debts). The technical details of these bond purchases will be made known at the end of the meeting on 4 June, indicated Mr Trichet, who also plans the purchase of this kind of asset in the range of €60bn. The ECB is therefore following the Bank of England and the US Federal Reserve on the path of “quantitative” and flexible measures.
It also indicated that the European Investment Bank (EIB) would become an eligible counterpart from 8 July. The EIB will therefore have access to ECB funding by taking part in the Euro-system's “open market” operations. (A.B./trans/rh)