08 November 2013

ECB: Mario Draghi presiding over a cut which left the central bank’s benchmark main refinancing rate at 0.25%.

By Financial Times.
The European Central Bank on Thursday responded to fears of deflation across the eurozone by unexpectedly cutting rates to a record low and insisting it had more weapons in its “artillery” to prevent price falls.
Mario Draghi strengthened his reputation as a far bolder ECB head than his predecessor, presiding over a cut which left the central bank’s benchmark main refinancing rate at 0.25 per cent and sent the euro tumbling against the dollar.
A fall in inflation last month to less than half the ECB’s target of just under 2 per cent has heightened concerns that disinflation, or even a period of Japan-style deflation, could add to the currency bloc’s economic woes. Though most analysts thought the ECB would wait until December to cut, Mr Draghi said there was now a possibility that the bloc could “experience a prolonged period of low inflation”.
The euro initially recorded its sharpest fall in almost two years. While it later clawed back some of those losses, it remained down about 0.8 per cent by late afternoon in London, trading at $1.34.
Investors applauded the decision, sending European stocks up to five-year highs at one point and eurozone bond yields tumbling. Most bourses eventually gave up their gains, but bond markets remained buoyant. Ken Wattret, eurozone economist at BNP Paribas, said: “The cut is welcome and appropriate. If you distil all the noise about the timing and the dynamics of the decision, it’s about low inflation and the ECB failing to deliver on its mandate.”
The support for the cut was not unanimous among the 23-member governing council, with Jens Weidmann, Bundesbank president, among a minority that called for rates to remain on hold at least until the central bank publishes a fresh round of economic forecasts next month.
The council also agreed to keep on providing potentially unlimited quantities of cheap loans to eurozone banks until the second half of 2015, though the deposit rate, which the central bank pays on lenders’ reserves parked at the ECB, remained at zero.
Mr Draghi said if inflation fell further than its current level of 0.7 per cent, the ECB had other options, including charging lenders to hold funds at the central bank and providing more liquidity through its longer-term refinancing operations.
However, the ECB president said the council was “not there yet” and that actions other than a rate cut were not discussed in depth at the meeting. The ECB could cut rates again if necessary.
Mr Draghi said that the eurozone was not suffering Japanese-style deflation, and that measures of medium-term price expectations implied inflation would return to target in the years ahead.
Inflation has been particularly low, and unemployment very high, in parts of the periphery. In Spain, inflation was 0.5 per cent in the year to September; in Italy it was 0.9 per cent. Ireland has had no inflation in the year to September. In Greece, prices have been falling since July.
Additional reporting by Robin Wigglesworth.
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