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Published On: Thu, Sep 4th, 2014

The ECB slashed rates to record lows in its battle against the deflation threat and the weakening euro zone economy

The European Central Bank decreased all of its three main interest rates; it added a couple of new stimulus programs, the ABS and the CBPP, to its arsenal in its epic fight against lowering inflation and the staggering euro area economy.

The ECB decreased all three interest rates; it added a couple of new stimulus programs in a fight against lowering inflation and the staggering economy.

The European Central bank slashed interest rates to fresh lows today in its effort to stimulate the stagnating euro zone economy and to fight off the deflation threat. The main refinancing rate was decreased to 0.05 percent from its previous value of 0.15 percent. Mario Draghi’s remarks on the rate cut were that the lower bound had been reached.

The interest rate on overnight deposits was also further cut to -0.20 percent. In this way banks are made to pay even more money to park cash at the ECB. The marginal lending facility was also cut to -0.30 percent.

Although markets seemed to be surprised by the aggressive move, in his previous public appearance Draghi stressed that inflation expectations has demonstrated substantive declines “at all horizons”. The euro zone CPI ticked down to 0.3 percent, dramatically diverging from the central bank’s target of close but below 2 percent.

The Governing Council made the decision today to commence the purchasing of non-financial private sector assets. Under the Asset-Backed Securities (ABS) program, the institution will buy a broad range of transparent ABSs. This underscores the vital role of this market in assisting the progress of fresh credit flows to the euro system.

Simultaneously with the ABS purchase program, the Eurosystem will also start purchasing a considerable range of euro-denominated covered bonds issued by financial institutions, which are domiciled in the euro area. This effort is dubbed Covered Bond Purchase Program (CBPP) and, like the ABS, will start in October this year. Both programs, combined with the targeted longer-term refinancing operations will substantially increase the ECB’s balance sheet.

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