Details: Today, the ECB decided to lower the interest rate on the main refinancing operations of the Eurosystem by 25 basis points to 0.50%, its lowest ever, and the rate on the marginal lending facility by 50 basis points to 1.00%. The rate on the deposit facility remains at 0.00%. The rate cut had been expected given that economic weakness persisted in the spring, as reflected by the deterioration in April confidence and activity indicators. President Draghi acknowledged that the risks to the growth outlook remain on the downside.
Our take: According to Mario Draghi today’s cut was not unanimous, probably because some central bankers fear that the lowering rates appears to be having little impact on the real economy, as the monetary transmission mechanism is impaired, particularly in countries where the banking sector is under significant strain such as in Portugal. Whilst banks’ behavior reflects a need to structurally reduce debt finance, the recovery is still likely to be delayed for lack of finance. Today the ECB announced that, together with other EU institutions, it will promote the development of a functioning market for asset-backed securities collateralised by loans to non-financial corporations. Such a market would help ease the difficulties faced by banks due to their credit ratios, possibly freeing them to lend more. In the Q&A session President Draghi also acknowledged that the ECB would keep an open mind about other policy options, including lowering ECB deposit rates for commercial banks, to negative territory. Some analysts suggest that this would force banks to find alternative instruments for parking excess liquidity. However, according to Vice-President Constâncio, negative deposit rates for commercial banks have led them to pass on the costs to consumers.
Though the impact of today’s rate cut on credit may be limited, it should, together with non-standard measures, help devalue the euro somewhat in the coming months. The euro has appreciated in the last few months due to the implementation of much looser monetary policy elsewhere in the world, particularly in the US and more recently in Japan. A weaker euro should help Europe to export its way out of the recession.