Interest rates in the Eurozone have been cut again – with the refinancing rate being trimmed from 0.15% to 0.05% and the deposit rate falling from -0.1% to -0.2%.
Mario Draghi, the European Central Bank president also announced the Bank has cut its growth forecasts for 2014 from 1% in June to 0.9% and for 2015 from 1.7% to 1.6%.
The euro plunged against its key counterparts after the announcement, as the ECB trimmed all its key interest rates and decided to conduct purchase of asset-backed securities – a lighter form of monetary policy than quantitative easing, to counter stubbornly low inflation.
In his press conference after ECB decision, Draghi noted that the bank would start purchases of "a broad portfolio" of asset-backed securities from October, which would have a sizeable impact on the balance sheet.
“Some of our governing council members were in favour of doing more than I've just presented, and some were in favour of doing less," he said.
"A broad asset purchase programme was discussed, and some governors made clear that they would like to do more."
Inflation in the Eurozone has been falling while unemployment has risen, and these measures have been taken to protect the region from deflation and to boost lacklustre growth.
“The difficulty is that many of the economies in the Eurozone are seeing minimal growth or are contracting with high levels of unemployment and economic indicators, pointing to a worsening outlook. In such an environment, banks are understandably going to be more cautious when making lending decisions and equally, so too are individuals and businesses about borrowing,” said Andy Scott, from foreign currency specialists HiFX.
As a result of the news equity markets in Europe rose 1.5% higher and government borrowing rates in Europe have fallen by more than 0.1% for peripheral countries.
If quantitative easing was introduced, Darren Ruane, head of Fixed Interest at Investec said investors should expect both bond and equity prices to rise.
Schroders European Economist Azad Zangana, predicts that the ECB will be forced to further their stimulus as the purchase of asset backed securities will not be sufficient to kick start growth.
“The limitations of this method have naturally pushed investors to conclude that the ECB will eventually be forced to buy other assets, but in particular, sovereign debt, in the same way the Fed and Bank of England were,” he said.
“For now, this is not on the ECB’s agenda, and if the ECB’s staff projections are right in forecasting a recovery in growth and inflation for next year, the ECB may never have to embark down that controversial path.
“It is worth mentioning that Draghi revealed that while some members of the governing council wanted more stimulus than was announced, a minority voted against the action that was eventually settled on. This suggests that there is still lots of resistance to QE, but also that other more aggressive options are available to use. Given the reaction in markets, investors are clearly betting on even more stimulus coming soon.”
