A weak economic outlook and the absence of an inflation threat justified the European Central Bank's decision to cut interest rates to the lowest in the short history of the 17-nation currency block, ECB President Mario Draghi told reporters Thursday.
The central bank cut its main interest rate by a quarter-point to a record-low 0.75 percent. The bank has never before cut the rate below 1 percent.
The Governing Council led by Draghi also narrowed the interest rate corridor by reducing the deposit rate and the marginal lending facility rate by 25 basis points each to zero and 1.5 percent, respectively.
"Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro area growth outlook have materialized," Draghi said in his introductory statement at the post-decision press conference in Frankfurt.
"The underlying pace of monetary expansion remains subdued."
Elsewhere, the Bank of England boosted its quantitative easing program by GBP 50 billion to GBP 375 billion and the People's Bank of China cut its interest rates for a second time this year.
Responding to queries, Draghi said the ECB did not co-ordinate its rate cut with its British and Chinese counterparts. Further, he said the decision was unanimous and that by itself carries a special strength to the decision, he pointed out.
The Governing Council did not discuss any non-standard measures today, he said. Policymakers also did not discuss negative rates and the bank is not precommitted on interest rates, he said. The bank is not running low on policy options, the ECB chief added.
Draghi said inflation expectations for the euro area continue to be firmly anchored, but economic growth continues to remain weak, "with heightened uncertainty weighing on confidence and sentiment".
Citing indicators, he said there was renewed weakening of growth in the second quarter and heightened uncertainty. "Looking beyond the short term we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors," he added.
"The risks surrounding the economic outlook for the euro area continue to be on the downside."
Answering questions from the press, Draghi said he expects a gradual recovery before the end of this year. Inflation is expected to fall below 2 percent next year. He reiterated that risks to the outlook for price developments continue to be broadly balanced over the medium term.
He urged banks to continue to strengthen their resilience where it is needed. The soundness of banks' balance sheets will be a key factor in facilitating both an appropriate provision of credit to the economy and the normalization of all funding channels, he said.
According to Draghi, credit flows remain weak in Eurozone. Credit is now led predominantly by demand and when demand is weak, a strong credit growth cannot be expected, he added.
Further, he said the relaxed collateral eligibility rules are meant to attract more banks, who can now use the collateral generated by lending to the general economy as collateral for ECB loans.
Today's deposit rate cut has several effects, he said, adding that the rate cut could lower the pricing on the long-term refinancing operations (LTROs) and its Emergency Lending Assistance (ELA).
Another effect is that, the deposit rate cut could act supply stimulus by expectations of further monetary policy easing in case price stability considerations were to warrant it, Draghi said.
"The reason why this price signal has a more powerful effect than before is that it has been accompanied by a reduction in the rate on the deposit facility," he said.
The measure is addressed to the whole of the euro area, which is witnessing slowing growth across the board, the central banker added.
Welcoming the European Council decisions from the June 29 summit, Draghi said the ECB agrees that Economic and Monetary Union needs to be put on a more solid basis for the future and that sustainable growth, sound public finances and structural reforms to boost competitiveness remain key economic priorities.
"We also welcome the euro area summit initiative towards a single supervisory mechanism, the possibility - with appropriate conditionality - to recapitalize banks directly, and the use of existing EFSF/ESM instruments in a flexible and efficient manner in order to stabilize markets," he said.
"Finally, the ECB is ready to serve as an agent to the EFSF/ESM in conducting market operations."
The two rescue funds are equipped enough to deal with the risks that can be envisaged now, Draghi said.
by RTT Staff Writer
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