ECB Pulls Out All Stops With Rate Cuts, Stimulus Boost

The European Central Bank unleashed some of it last remaining stimulus weapons on Thursday, cutting all three of its interest rates and expanding asset-buying to boost the economy and prevent ultra-low inflation becoming entrenched.

It slashed its inflation expectations for this year but also suggested that interest rates would go no lower.

In moves that briefly pushed the euro 1 percent down against the dollar, the ECB cut its deposit rate deeper into negative territory and increased monthly asset buys to 80 billion euros from 60 billion euros, above expectations of a hike to 70-billion.

While the deposit rate was cut 10 basis points to -0.4 percent, the main refinancing rate was shaved to zero from 0.05 percent and its marginal lending rate -- used by banks to borrow from the ECB overnight -- fell to 0.25 percent from 0.3 percent.

"Rates will stay low, very low, for a long period of time and well past the horizon of our purchases," ECB President Mario Draghi, judged to have disappointed markets in December with measures below expectations, told a news conference.

Purchases are due to end in March next year.

He added, "From today's perspective and taking into account the support of our measures to growth and inflation, we don't anticipate that it will be necessary to reduce rates further,"

The ECB said it would also start buying corporate debt and launch four new rounds of cheap loan packages, to be extended by banks to the real economy.

Slashing its 2016 inflation forecast from one percent to just 0.1 percent, the Bank said further rounds of ultra-cheap four-year loans to banks could include extra financial sweeteners for them to take up the offer to pass on to others.

"A bank that is very active in granting loans to the real economy can borrow more than a bank that concentrates on other activities," Draghi noted.

Reaction
"Good news for Europe: Having delivered less than expected in December, the ECB returned to its usual form today and eased policy by a bit more than projected," said Holger Schmieding at Berenberg bank.

But others were more critical, warning that such loose monetary policy risked creating asset price bubbles and removed any incentive for governments to reform their economies.

"What will happen if the global economic situation deteriorates sharply once more, requiring a strong monetary policy response? I do not anticipate this happening, but if it did, the ECB would have already shot most of its powder,” said Michael Menhart, chief economist at German reinsurer Munich Re.

Draghi answered such criticisms partly in German, arguing: "Suppose we had embraced the 'nein zu allem' ('no to everything') policy strategy? We deem that the counterfactual would have been a disastrous deflation."

But he acknowledged the limitations of negative rates and said any future moves would likely have to focus on other, non-conventional measures.

"Does it mean that we can go as negative as we want without having any consequences on the banking system? The answer is no," he said.

The ECB has little to show for the 700 billion euros it has spent buying government bonds and other assets in the past year, as tumbling raw materials prices blunt the impact of its quantitative easing.

That raises the risk that people will lose faith in the bank's commitment to its mandate. Inflation has been below the ECB's nearly 2 percent target for three years and is likely to remain so for many more.

The ECB's move came after the G20 group of the world's major economies last month agreed they need to look beyond ultra-low interest rates and printing money to shake the global economy out of its torpor.

The U.S. Federal Reserve, the Bank of Japan, Bank of England and Swiss National Bank are all set to meet next week.

While Europe's growth prospects have held up relatively well on resilient domestic consumption, weak business and industrial sentiment indicators suggest it is facing increasing headwinds, particularly from slowing growth in China.

(Reuters)