Thursday, May 2, 2013
ECB cuts rate, offers banks cash, explores loans to firms
The European Central Bank (ECB), which earlier today cut its main policy rate by 25 basis points to 0.50 percent, will continue to provide banks with all the money they need “for as long as necessary,” and wants to channel money to smaller businesses by creating a new market for asset-backed securities.
The ECB, which was widely expected to cut its main refinancing rate due to a deepening recession, declining inflation and rising unemployment, said it still expects the economy to “stabilize and recover gradually in the second half of the year,” repeating its forecast from recent months.
ECB President Mario Draghi admitted the risks surrounding this outlook remain on the downside, with the possibility of weaker-than-expected domestic and global demand along with slow or insufficient structural reforms.
“These factors have the potential to dampen confidence and thereby delay the recovery,” Draghi told a press conference, echoing his comments from April 4.
The ECB cut its rate due to low medium-term inflationary pressures, continued weak economic sentiment, and said the move should support prospects for economic recovery.
“Against this overall background our monetary policy stance will remain accommodative for as long as needed,” Draghi said.
Speculation had intensified in recent days that the ECB would cut rates following news that the inflation rate for the 17 nations sharing the single currency fell to 1.2 percent in April, the lowest since February 2010, and well below the ECB's target of inflation that is below but close to 2 percent.
The ECB forecasts inflation of 1.6 percent this year and 1.3 percent in 2014.
At last month's ECB meeting, Draghi had also said that the bank was keeping a close eye on economic data for its impact on monetary policy and was ready to act. He had also said the ECB was looking at various instruments and tools to stimulate economic activity.
In order to ensure that euro zone banks have enough funds to meet demand for loans, Draghi said the ECB would continue to conduct its main refinancing operations (MROs) as fixed rate tenders with full allotment for as long as necessary, and at least until July 8, 2014.
In addition, the ECB’s three-month, longer-term operations (LTROs) would be allotted until the second quarter of 2014 as fixed rate tenders with full allotment.
But despite the ECB’s generous financing in recent years, banks are still saddled with non-performing loans and demand for credit remains weak due to slowing economic activity.
In order to try and channel funds more quickly and directly to smaller European businesses, the ECB has started discussions with other European institutions “on initiatives to promote a functioning market for asset-backed securities collateralized by loans to non-financial corporations,” Draghi said.
Despite Draghi’s hopes for economic improvement in the second half of this year, there are few signs of improvement. The unemployment rate in the euro zone rose to 12.1 percent in Mach from 12.0 percent, the highest level since Eurostat, the European Union's statistics office, started collecting the data in 1995.
And Gross Domestic Product in the euro zone shrank by 0.6 percent in the fourth quarter of 2012, its fifth quarterly contraction in a row, for an annual decline of 0.9 percent, up from 0.6 percent in the third quarter.
Economist forecast a further contraction in the first quarter of this year.
To boost confidence and help growth prospects, Draghi called on euro area governments to “intensify the implementation of structural reforms at a national level,” continue their fiscal consolidation efforts and bank recapitalization, along with “swift implementation of the banking union.”
Despite the recent trend toward austerity measures, which cut the average euro area government deficit to 3.7 percent of GDP from 4.2 percent in 2011, average government debt has risen to 90.6 percent of GDP from 87.3 percent, Draghi said.
“Structural reforms should target improvements in competitiveness and adjustment capacities, as well as aim to increase sustainable growth and employment,” Draghi added.
Reflecting the recent agreement between struggling Cyprus and the European Union, the ECB will again accept debt and other instruments guaranteed by Cyprus as collateral for ECB funds, subject to special haircuts, the ECB said.