Stimulation measures for euro zone

European Central Bank president Mario Draghi has introduced negative interest rates. Photo by Reuters.
European Central Bank president Mario Draghi has introduced negative interest rates. Photo by Reuters.
The European Central Bank (ECB) has introduced a raft of measures aimed at stimulating the euro zone economy, including negative interest rates and cheap long-term loans to banks.

It cut its deposit rates to banks from zero to -0.1% to encourage banks to lend to businesses rather than hold on to the money.

The ECB also cut its benchmark interest rate to 0.15% from 0.25%.

Craigs Investment Partners broker Chris Timms said the ECB was the first major central bank to introduce negative interest rates.

It had been tried before in smaller economies. Sweden and Denmark, both outside the single currency zone, attempted to use negative rates in recent years with mixed results.

ECB president Mario Draghi also announced other measures. Long-term loans would be offered to commercial banks at cheap rates until 2018. The loans were capped at 7% of the amount the individual banks in question lent to companies.

''The more banks lend to companies, the more money they can borrow cheaply from the ECB,'' Mr Timms said.

''It is also doing preliminary work that could lead to buying bundles of loans that were made to small businesses in the form of bonds. This is being seen as a step towards providing companies with credit through the financial markets.''

Mr Draghi said in a statement the ECB's policymakers unanimously agreed to consider more unconventional measures to boost inflation if it stayed too low.

However, the central bank stopped short of instituting a large asset-buying programme like the quantitative easing undertaken by the United States Federal Reserve.

Mr Draghi insisted more would be done, if necessary.

Even though some of the measures, like the move to negative rates on deposits, were expected, European shares moved higher on the ECB announcement, Mr Timms said.

Harbour Asset Management analyst Christian Hawkesby said the New Zealand dollar rose to US85c after the announcement and should remain relatively elevated while the Reserve Bank remained the lone central bank lifting official interest rates.

''More generally, we believe the fact the ECB is taking further measures is a useful reminder of the massive policy support global markets are still receiving, which should be supportive for global growth and risk assets, such as global equities.''

 

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