ECB Cuts Interest Rates, Introduces Negative Deposit Rate

H/t reader J. S.:

“The EU is getting desperate,

I didn’t really think they would do it but they did.”

Updated: ECB Cuts Interest Rates, Introduces Negative Deposit Rate (Kitco News, June 5, 2014):

Following its monthly monetary-policy meeting Thursday, the European Central Bank cut interest rates on its main refinancing operation at by 10 basis points, bringing it down to 0.15%. As expected the central bank introduced a negative deposit facility rate with a 10 basis point cut, bringing it to minus 0.10%

The ECB also dropped its marginal lending facility rate by 35 basis points to 0.45%.

Some economists have questioned how effective the ECB’s anticipated rate cuts will be to spur lending and boost economic activity, but Andrew Grantham, senior economist from CIBC, said there are indication of a recovery in loan demand and that this new action could have a greater chance of success.

However, Grantham added that the central bank still has to do more if it wants to weaken the euro, which has been a significant obstacle to growth.

“What today’s rate cut and promise of further action shows is that the ECB will not stand idle as growth wanes and deflation threatens. Assuming that the ECB steps up to the plate again and eases policy enough to dampen the euro as we expect, we remain optimistic on the outlook for Eurozone GDP, particularly in 2015 when we forecast a consensus-topping 1.9% growth rate,” he said.

Economists were almost unanimous in their expectations that the ECB would cut interest rates as inflation remains stubbornly low.

On Tuesday, Eurostat said annual consumer inflation fell to 0.5% in May, a drop from April’s reading of 0.7% and well below the central bank’s target of 2%.

Investors will now wait until 8:30 a.m. EDT for the monthly press conference hosted by ECB President Mario Draghi. Draghi will also present updated staff projections for 2014 to 2016. Market players will be waiting to hear if he announces some new long-term refinancing operation to help stimulate the credit market.

Some economists have noted that a new LTRO would need to have some pretty strong incentives to attract the banks, which are currently paying off the round of loans from 2011.

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