Canadian Manufacturing

European Central Bank cuts rate to almost nothing

With things looking grim in the Eurozone, the ECB's cut puts its benchmark rate at one-twentieth of the interest rate in Canada

FRANKFURT, Germany—The European Central Bank has cut its interest rates and announced a new stimulus program that involves buying financial assets, a bid to salvage a weak economic recovery.

The ECB trimmed its benchmark interest rate to 0.05 per cent from a previous record low of 0.15 per cent.

The benchmark refinancing rate determines what banks pay the ECB for credit. It influences what banks charge businesses and consumers to borrow.

ECB President Mario Draghi said the bank would start purchases of investments called asset-backed securities and covered bonds in October. The measures fall somewhat short of some expectations that the ECB would go for a program buying government bonds, similar to what the Federal Reserve has undertaken.

The moves aim to make credit cheaper at a time when concerns are growing that the economy of the 18-country eurozone might go into reverse. It did not grow in the second quarter, raising fears of a triple-dip recession.

The ECB cut its growth forecast for 2014 to 0.9 per cent from 1.0 per cent previously. It lowered its inflation forecast for the year to 0.6 per cent from 0.7 per cent.

The ECB also cut its deposit rate—what banks pay to keep their money at the central bank—to minus 0.2 per cent from minus 0.1 per cent. The negative rate is an effort to push banks to lend money by imposing a financial penalty for hoarding it in the safety of the ECB’s accounts.

Lower rates stimulate more lending and growth. However, lower rates become less effective as a stimulus tool as they approach zero. That is why the ECB is also looking at further measures to boost credit to businesses.

Asset-backed securities are investments based on assets such as loans to companies and mortgages. Buying them would stimulate the market for such bonds and for banks to make the loans that make up the assets. Covered bonds are similar, but have additional rights for lenders.

Pan Pylas in London contributed to this report.

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