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ECB cuts rates again in bid to lift fragile eurozone

ECB cuts rates again in bid to lift fragile eurozone

The European Central Bank (ECB) has cut interest rates for the second time in three months in a bid to boost the eurozone's fragile economic recovery.

The ECB has cut its main rate, which is used as a benchmark for consumer borrowing, from 0.15% to 0.05%. The rate was cut from 0.25% in June.

After entering unchartered territory by introducing a negative deposit rate in June, the ECB has now raised the amount it will effectively charge banks to park their money with it. The deposit rate has been cut from -0.1% to -0.2%. Rates on the ECB's marginal lending facility have meanwhile been cut from 0.4% to 0.3%. That rate was cut from 0.75% in June.

In his press conference announcing the measures, ECB president Mario Draghi also revealed the bank would start buying non-financial assets through an asset-backed security (ABS) programme and buy covered bonds from European banks, in addition to the €400 billion stimulus package announced in June. However, Draghi gave no details on the size of the new programme.

Nor did he announce any quantitative easing (QE), although he said a potential launch was discussed at the policy meeting, and reiterated that the bank was ready to use unconventional measures.

'In our analysis, we 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,' he said.

'Should it become necessary to further address risks of too prolonged a period of low inflation, the governing council is unanimous in its commitment to using additional instruments within its mandate.' Eurozone inflation is currently languishing at a five-year low of 0.3%, and the ECB has cut its forecast for 2014 inflation from 0.7% to 0.6%.

News of the ABS and covered bonds-buying schemes, sent the euro, which had already tumbled when the interest rate cut was announced, falling further. Before the rates decision, the euro was trading at $1.3129, and has now dropped to $1.3027.

Germany's DAX 30 and France's CAC 40 indices both jumped sharply on the news. The DAX, which had been in the red, moved 0.9% higher, while the CAC 40 strengthened gains to trade 1.3% higher on the day. The FTSE 100, which had inched higher ahead of the decision, was trading 0.2% higher at 6,888.

The Bank of England meanwhile announced interest rates would be kept on hold at their historic low of 0.5% for the 66th consecutive month.

FTSE creeps higher as investors await Draghi

11:06 The FTSE 100 edged higher as investors awaited the next move from European Central Bank (ECB) president Mario Draghi to boost the eurozone’s flagging recovery.

The UK blue-chip index added eight points, or 0.1%, to 6,882. There were few major movers bar Standard Life (SL), up 8% at 417p as the insurer sold its Canadian business, and Hargreaves Lansdown (HRGV), down 4.1% at £10.30, with the online stockbroker continuing to suffer from a drop-off in profit growth announced in yesterday’s full-year results.

Investors were largely sitting on their hands ahead of the ECB’s decision on rates and Draghi’s press conference later today. Faced with persistently low inflation and weak economic data in the eurozone, pressure is building on Draghi to announce further stimulus, after the June rate cut and flagging up of €400 billion of measures.

The bank has so far shied away from all-out quantitative easing (QE), but remarks from Draghi last month the bank was ‘ready to adjust our policy stance further’ has led some to believe a money-printing programme may be his next move.

M&G European Corporate Bond manager Stefan Isaacs said that while Draghi was unlikely to unveil QE measures later today, the ECB would eventually be forced to resort to further stimulus in order to lift the flagging eurozone economy.

‘Having offered refinancing cuts, forward guidance, massive liquidity in the form of the long-term refinancing operation and the targeted long-term refinancing operation, the ECB will ultimately be forced to follow other central banks in undertaking broad asset purchases,’ he said.

‘Whilst these broad purchases or QE are unlikely to be unveiled today, they are the only means in the near term of ensuring that the banking system in Europe is able to extend significantly more credit to the real economy.

There was more movement among ‘mid cap’ stocks on the FTSE 250, with Supergroup (SGP) up 11.3% at £11.64 as the fashion retailer posted a 15.9% rise in first quarter sales. Talk Talk Telecom Group (TALK) was up 4.2% at 313.5p as analysts at JP Morgan raised their price target to 460p from 450p.

Go-Ahead (GOG) rose 3.9% to £23.61 as the rail and bus operator raised its dividend for the first time in six years, by 4.3% to 84.5p per share, after profits jumped 19% in the year to the end of June.

Serco (SRP) meanwhile traded 3.2% higher at 322.9p as the outsourcing firm was selected as the preferred bidder to continue running Australia’s immigration detention centres.

Betfair (BETF) rose 2.8% to £11.26 as the online gambling group reported record profits due to the football World Cup.

Balfour Beatty (BALF) meanwhile inched a penny higher at 242.1p after the infrastructure company finally sealed a deal to sell its US division Parsons Brinckerhoff to Canada’s WSP Global (WSP.TO).

The sale of Parsons Brinckerhoff had proved one of a number of sticking points that plagued Carillion’s (CLLNnow-aborted takeover deal for Balfour Beatty.

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Stefan Isaacs
Stefan Isaacs
10/27 in Bonds - Euro Corporates (Performance over 3 months) Average Total Return: -0.27%
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