Thursday, September 4, 2014

ECB cuts repo rate 10 bps to 0.05%, deposit rate -0.20%

    The European Central Bank (ECB) cut its benchmark refinancing rate by further 10 basis points to 0.05 percent and pushed its deposit rate deeper into negative territory by cutting it by 10 points to minus 0.20 percent.
    In addition, the ECB cut the rate on its marginal lending facility by 10 points to 0.30 percent. ECB President Mario Draghi will comment on the reasons for the rate cut later today.
    Although the rate cut comes only three months after the ECB's previous cut in June, Draghi said on Aug. 22 in Jackson Hole that he was "ready to adjust the policy stance further" and on Saturday ECB Board member Benoit Coeure echoed this statement in a Greek newspaper.
    Since its rate cut in June, the ECB's first this year following two cuts in 2013, the economy of the 18-nation euro area has weakened and inflation fallen further.
    The Gross Domestic Product of the euro area stagnated in the second quarter from the first quarter for annual growth of 0.7 percent, down from 0.9 percent in the first quarter.
    Inflation in August fell to 0.3 percent, the weakest rate since October 2009, from 0.4 percent in July, and further below the ECB's target for inflation that is just below 2.0 percent.

    In June the ECB cut its refi rate and deposit rate by 10 basis points, the first time a major central bank had pushed the deposit rate into negative, in effect charging banks for depositing their excess reserves at the ECB instead of using them to stimulate economic activity.
    Allthough Draghi's speech in Jackson Hole had stoked expectations that the ECB would ease its policy further today, most economists had not expected the ECB to cut rates so soon after June.
    In addition to its rate cut in June, the ECB also launched a package of stimulus measures, including up to 400 billion euros in targeted longer-term refinancing operations (LTROs) in September and December.
    During his speech last month, Draghi also called on policy makers to use fiscal policy to help boost demand and get serious about structural reforms that can boost the euro area's global competitiveness.


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