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This man is taking the euro deeper and deeper into the unknown

The ECB cut a key interest rate to a new record low for the region today.

ECB president Mario Draghi
ECB president Mario Draghi
Image: AP Photo/Michael Probst

THE EUROPEAN CENTRAL Bank stepped up efforts to kickstart chronically low inflation in the euro area, cutting a key interest rate and extending its controversial asset purchase programme.

At the ECB’s last monetary policy meeting of the year, the governing council decided that the key deposit rate, already in negative territory, would be lowered further to -0.30%.

The deposit rate is normally the interest banks would receive from parking cash overnight at the ECB. But it has been in negative territory since June 2014, meaning banks effectively have to pay the ECB to hold their funds. 

The idea behind the negative interest rate is to persuade banks to lend the money to businesses and households rather than store it at the ECB.

The ECB held its other two key rates – the refi and marginal lending rates – unchanged at 0.05% and 0.30% respectively.

At his traditional post-meeting news conference, president Mario Draghi announced a beefing up of the bank’s controversial money-creation programme, known as quantitative easing (QE).

In a bid to bring eurozone inflation back up to levels conducive to healthy economic growth, the ECB has already unleashed an unprecedented series of measures.

It has slashed borrowing costs, made vast amounts of cheap loans available to banks and most recently embarked on a programme to buy around €60 billion of sovereign bonds each month until at least September 2016.

But inflation across the eurozone is still stubbornly low, standing at just 0.1% in November, far below the ECB’s target of just under 2.0%.

Inflation Eurozone inflation Source: Eurostat

Santa Mario and his gifts

In a bid to correct this, the ECB decided to extend the purchases to March 2017 and possibly beyond and to widen the net to include other categories of bonds, Draghi said.

He insisted that the measures were working and that was why the ECB had decided to step up the QE programme. The ECB was “doing more because it works, not because it fails,” he added.

“Santa Mario did not turn into the Grinch, the Christmas monster. However, (he) left many market participants disappointed like small kids who receive less and smaller presents than expected on Christmas eve,” said ING DiBa economist Carsten Brzeski.

Germany European Central Bank Valls Source: AP Photo/Michael Probst

Jonathan Loynes at Capital Economics also said the ECB had “failed to live up to its own hype”.

“Of course, it’s possible that the slightly better news on the economy over recent weeks persuaded the governing council that more aggressive action was not necessary. And Draghi has left the door open to further policy loosening in the future,” he said.

The euro has recently dropped against other major currencies, including the US dollar, although it bounced back today after Draghi failed to meet expectations of further devaluation measures.

- © AFP 2015, additional reporting TheJournal.ie staff

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