FRANKFURT, Germany – The European Central Bank on Thursday cut interest rates and took a raft of unconventional steps to prevent the 18-country eurozone from sliding into a bout of deflation that could drag down a muted economic recovery.
The ECB’s steps aimed to raise inflation and increase the flow of credit in an economy where lending is weak. They include cheap, long-term loans to banks, tied to the understanding that banks would loan the money to businesses, boosting growth.
And for the first time, the ECB took the untested step of imposing a negative interest rate on money that banks deposit with it, from zero to minus 0.1 percent. That would push the banks to lend the money, not hoard it. It also cut its main interest rate, the refinancing rate, from 0.25 percent to 0.15 percent.
The actions contributed to a rally in European stock markets and a further fall in the value of the euro.
Announcing the new measures, ECB President Mario Draghi said the central bank would:
Offer long-term loans to banks at cheap rates until 2018. The targeted loans would be charged a fixed rate, meaning that the rate could not rise, even if the ECB raises its benchmark.
That gives banks the assurance of cheap funding through 2018. The amounts they can borrow will be tied to the amounts banks lend to companies.
Start doing preparatory work on a program to buy batches of loans to small businesses in the form of bonds, a step to funnel more credit to companies through financial markets.
Stop collecting weekly deposits aimed at offsetting the monetary effects of earlier bond purchases. That would leave an additional $237 billion in the financial system that banks could, in theory, use to lend to each other or to companies.
Draghi also did not close the door to a still more drastic step, large-scale purchases of bonds to inject newly created money into the economy.
Many economists say that would be the most effective step the bank could take in boosting inflation.
The U.S. Federal Reserve, Bank of Japan and Bank of England have all made such purchases. But the ECB has held off due to the legal and practice complexities of such purchases in a currency union with 18 members.
The ECB eased the monetary reins massively today, said Joerg Kraemer, Commerzbank chief economist.