Euro bank cuts interest rate and expands stimulus

ECB president Mario Draghi, right, and VP Vitor Constancio after the meeting of the bank's governing council in Frankfurt, Germany
ECB president Mario Draghi, right, and VP Vitor Constancio after the meeting of the bank's governing council in Frankfurt, Germany

The European Central Bank has cut a key interest rate and extended its stimulus programme to bolster the 19-country eurozone economy - but the actions underwhelmed investors, who pushed stocks sharply lower.

The main move by the ECB was to cut the interest rate on deposits from commercial banks from -0.2 to -0.3 per cent.

That is intended to push banks to lend by imposing a penalty on the cash they park at the central bank. Many in the markets, however, had predicted a bigger cut to -0.4 per cent.

And alongside other measures, ECB president Mario Draghi said the bank will extend the duration of its bond-buying programme, which aims to make borrowing cheap in the wider economy.

Mr Draghi said the programme, which was due to run at least through September 2016, is now intended to run until March 2017 or beyond if necessary. Though the program has been extended, which will increase the size of the overall stimulus from the previous 1.1 trillion euros (£780bn), the monthly cap of g60bn (£42bn) in purchases was maintained.

“Today’s decisions were taken in order to secure a return of inflation rates towards levels that are below, but close to, to per cent and thereby to anchor medium-term inflation expectations,” Mr Draghi told reporters at a news conference.

The actions were not enough, however, to satisfy markets, which expected significantly more.

“This has been a huge failure from the ECB,” said James Hughes, chief market analyst at GKFX. “Much more was expected.”

Mr Draghi said the decisions were not unanimous but that there was a very large majority in favour of the moves. He said the deposit rate cut was “adequate.”

“I don’t think our communication was wrong,” he said. “I think these measures need time to be fully appreciated.”

The ECB wants to raise annual inflation toward its goal of just under two per cent as part of its legal mandate to maintain price stability.

Mr Draghi said there are “continued downside risks” to the inflation outlook. The ECB trimmed its forecasts for inflation next year, to one per cent from 1.1 and for 2017 to 1.6 from 1.7 per cent.