Another ECB rate cut on the cards

Another ECB rate cut on the cards

The European Central Bank is preparing a package of policy options for its June meeting, including cuts in all its interest rates and targeted measures aimed at boosting lending to small and mid-sized firms (SMEs).

According to Reuters news agency, five people familiar with the measures being prepared detailed plans involving a potential rate cut, including the ECB’s deposit rate going negative for the first time, along with the targeted measures SME measures.

The package offers some stimulus for the euro zone economy but falls short of the large-scale effect the ECB could unleash with a major programme of quantitative easing (QE) – money printing to buy assets. Such a QE plan is still some way off.

A June rate cut is “more or less a done deal”, said one of the five sources.

A second source echoed that sentiment, and added: “This will be the first major central bank to move to a negative deposit rate. That would move the exchange rate.”

ECB executive board member Peter Praet also told German weekly newspaper Die Zeit the central bank could cut its deposit rate into negative territory as part of a package of policy measures that could also include a targeted long-term refinancing operation (LTRO).

The latter is a method of boosting bank liquidity in the euro zone with an eye to increasing lending.

The first two sources spoke of a cut of 10-20 basis points, probably in all three ECB rates. The main refinancing rate is currently at 0.25 per cent.

Both sources expected the move to bring down the currency exchange rate but said the ECB had made no calculation of how much it was likely to fall by, and had no target for the euro.

The ECB declined to comment when asked about the plans.

ECB president Mario Draghi said last week the Governing Council was “comfortable with acting next time” – its June 5th policy meeting – but wanted to see updated economic projections from the bank’s staff first.

“Negative deposit rates are a possible part of a combination of measures,” Mr Praet told Die Zeit. “We are preparing a range of things. We could again lend banks money for a longer time frame, possibly with conditions attached.”

Praet did not see the ECB embarking on US-style QE unless economic conditions deteriorated: “I think it will only come to that if the euro zone economy and inflation develop significantly worse than we expect,” he said.

The ECB’s deposit rate already stands at zero and a cut into negative territory would see it essentially charge banks for holding their money overnight – a move that could spur more lending, though analysts are unsure how banks would react.

The ECB is concerned by the euro’s strength and low inflation, which Mr Draghi is worried could get stuck in what he calls a “danger zone” below 1 per cent. At 0.7 per cent, inflation is running well below the ECB’s target of just under 2 per cent.

The bank is also concerned about weak lending to SMEs.

Another source was less sure the new staff forecasts would merit policy action but confirmed a package was under discussion should the Council decide to act. Some analysts believe a small cut in the ECB’s interest rates would have little impact.

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