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ECB Unexpectedly Cuts Interest Rates as Outlook Darkens

European Central Bank President Mario Draghi. Photographer: Ralph Orlowski/Bloomberg
European Central Bank President Mario Draghi. Photographer: Ralph Orlowski/Bloomberg

The European Central Bank unexpectedly cut interest rates to spur economic growth and stave off the threat of deflation.

The ECB’s 24-member Governing Council reduced all three of its main interest rates by 10 basis points. The benchmark rate was lowered to 0.05 percent and the deposit rate is now minus 0.2 percent. The euro slid, as a reduction in the benchmark rate was predicted by just six of 57 economists in a Bloomberg News survey. Draghi will speak to reporters at 2:30 p.m. in Frankfurt to explain the decision.

The rate cuts come three months after an historic package of stimulus measures, and two weeks after Draghi signaled he was ready to act again. Additional measures he could unveil later may include a purchase program for asset-backed securities or a larger program of quantitative easing that risks dividing policy makers.

“We would not exclude an announcement that the Governing Council has made a decision to conduct an ABS-purchase program,” said Nick Matthews, senior economist at Nomura International Plc in London, who predicted the rate cuts. “Clearly the deterioration in inflation expectations has been pronounced and precipitous, sending a very worrying signal about the ECB’s recently announced easing policies.”

ABS Program

Plans to outline a purchase program for ABS and covered bonds worth as much as 500 billion euros ($656 billion) were discussed by the Governing Council, Reuters reported today, citing unidentified people familiar with the discussions. The program would have a duration of three years and the ECB could start buying the assets this year, it said.

The rate cuts come after gross domestic product in the euro area unexpectedly stagnated in the second quarter as the three biggest economies failed to grow. Germany’s economy, the region’s largest, shrank 0.2 percent, its first contraction since the start of 2013.

The euro fell 1 percent to $1.3025 at 2:10 p.m. Frankfurt time.

Euro area inflation was 0.3 percent last month, the weakest since 2009 and a fraction of the ECB’s 2 percent goal. Staff economic forecasts to be published today could back the case for more action, with Governing Council member Ewald Nowotny signaling last month that the outlook will be revised lower.

In June, the central bank predicted average 2014 inflation of 0.7 percent, a level surpassed only once this year. A forecast of 1 percent economic growth has been undermined by stagnation last quarter.

More Stimulus

Today’s ECB decision comes even after Draghi said in June that “for all the practical purposes, we have reached the lower bound.” That month, he cut the benchmark rate, took the deposit rate negative for the first time and said any further changes would mainly be “technical adjustments.”

The Bank of England left its key interest rate unchanged today in London, at a record-low 0.5 percent, while Sweden’s Riksbank kept its repo rate at 0.25 percent.

Any commitment from the ECB to an ABS-purchase program today would be a step up from last month, when Draghi said a final decision “will depend on the action of many other actors.”

It could also stir dissent among Governing Council members wary of assuming more risk before countries such as France and Italy implement economic reforms. Bloomberg reported last week that New York-based BlackRock Inc., the world’s biggest money manager, has been hired to provide advice on the design and implementation of a plan.

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