ECB cuts rates and launches stimulus programme

ECB President Mario Draghi explained that there are some differences amongst council members

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The European Central Bank has cut its benchmark interest rate to 0.05%, and introduced new stimulus measures.

The ECB had earlier cut its rate from 0.25% to 0.15% in June, and also became the first major central bank to introduce negative interest rates.

It will also launch an asset purchase programme, which will buy debt products from banks.

It is hoped this move will add liquidity to the financial system and revive lending.

'Mid-road'

The move falls short of a programme of buying government bonds - a process known as quantitative easing (QE), and one which the US Federal Reserve has undertaken.

ECB boss Mario Draghi said that QE had been discussed by the bank.

"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.

"So our proposal strikes the mid-road.... a broad asset purchase programme was discussed, and some governors made clear that they would like to do more."

The ECB has been under pressure to kick-start the eurozone economy, as manufacturing output has slowed and inflation has fallen to just 0.3%.

In his latest blog BBC Business Editor Robert Peston described today's move as "a last roll of the dice".

"The European Central Bank has now almost exhausted its ammunition for preventing the Eurozone sliding into a devastating deflationary, contractionary spiral," he said.

euro notes The ECB hopes to increase lending in the eurozone economy
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Analysis: Andrew Walker, BBC Economics Correspondent

So the ECB is getting back into the business of buying financial assets. No government debt this time, though it's clear that could yet come.

Instead the focus is on assets that bundle up private sector loans.

Does that sound familiar? Yes, it was that kind of stuff that played a central role in the financial crisis, especially mortgage backed securities in the US.

But that market is much less developed in Europe and it could ultimately help the Eurozone deal with another problem: the continued weakness of the banks.

If the market for this type of asset were to expand it would make European business finance a bit more American, with a bigger share of commercial loans coming through the financial markets and less through struggling banks.

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'New credit flows'

Referring to one element of the new stimulus programmes, the purchase of asset-backed securities (ABS), Mr Draghi said: "The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase programme.

"This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter."

Mr Draghi also gave an update on the ECB's forecasts for the eurozone economy.

The new predictions warned of slower growth, of 0.9% in 2014, and of 1.6% in 2015.

Meanwhile the forecast for inflation was cut to 0.6% rising to 1.1% in 2015, and well short of the ECB's target of close to, but below, 2.0%.

After the latest news was announced the euro fell to $1.2996, the lowest since July 2013 and the first time it has fallen below $1.30 since then.

'Progress'

As was the case after the ECB's last rate cut in June, Mr Draghi again said that cuts had reached "the lower bound".

The main benchmark refinancing rate determines what banks pay the ECB for credit, and affects what banks charge companies to borrow.

The central bank also cut its deposit rate, what banks pay to keep their money at the central bank, to minus 0.2% from minus 0.1%.

It is hoped that this measure will encourage banks to lend to business, rather than sit on their cash.

"For years the ECB has been very slow to react and often frustrated markets," said Aberdeen Asset Management Investment Manager Luke Bartholomew.

"But in the face of dire and clearly worsening economic indicators Draghi has actually gone beyond markets' expectations today. The frustration is that it has taken so long with inflation having already fallen so low, but it is certainly progress."

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