The European Central Bank (ECB) has surprised makets by trimming each of its key rates and announcing an asset buying program, amid concerns about slowing growth momentum.
At its meeting Thursday, the Governing Council of the ECB cut rates by 10 basis points, taking the interest rate on the main refinancing operations of the Eurosystem down to 0.05%, the rate on the marginal lending facility to 0.30%, and the deposit facility rate further into negative territory, down to -0.20%. All of these cuts take effect September 10.
The ECB also said that it will start purchasing non-financial private sector assets. ECB president, Mario Draghi, said that it will purchase a broad portfolio of asset-backed securities (ABS) and a portfolio of euro-denominated covered bonds, starting in October. The details of these programs will be announced after its meeting on October 2.
Draghi said that these decisions “reflect the fact that there are significant and increasing differences in the monetary policy cycle between major advanced economies. They will further enhance the functioning of the monetary policy transmission mechanism and support the provision of credit to the broad economy.”
In taking these steps, Draghi said that the bank “took into account the overall subdued outlook for inflation, the weakening in the euro area’s growth momentum over the recent past and the continued subdued monetary and credit dynamics.”
These policy decisions aim to anchor medium to long-term inflation expectations in line with the ECB’s goal of keeping inflation below, but close to, 2%. “As our measures work their way through to the economy they will contribute to a return of inflation rates to levels closer to 2%,” he said, adding that it is committed to using additional unconventional instruments, if necessary.
The ECB is now forecasting annual real GDP growth of 0.9% in 2014 and 1.6% in 2015, which represent downward revisions from its previous forecast; before growth picks up to 1.9% in 2016. It also says that the risks surrounding the economic outlook for the euro area are on the downside. “In particular, the loss in economic momentum may dampen private investment, and heightened geopolitical risks could have a further negative impact on business and consumer confidence. Another downside risk relates to insufficient structural reforms in euro area countries,” Draghi noted.
He also stressed that structural reform efforts in the region “now clearly need to gain momentum to achieve higher sustainable growth and employment in the euro area.”