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ECB Announces ABS Purchase Program and Cuts Rates

James Boston
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ECB Announces ABS Purchase Program and Cuts Rates

The European Central Bank (ECB) has just completed it’s regular monthly Governing Council meeting at which it has taken the decision to cut all three of its main interest rates by 10 basis points. The key Refi Rate has now been reduced from 0.15% to 0.05% while the Overnight Deposit Rate now stands at a negative -.02% and the Marginal Lending rate falls to 0.30%.

Near zero interest rates have effectively been cut to nearer to zero, this is not likely to have any significant impact in its own right, the previous round of 10 basis point cuts in June have had little measurable impact on the struggling Eurozone economy.

The ECB had two goals in mind when they made their decision to further reduce their range of interest rates. Firstly, to show action, the Bank has come under much criticism for it’s wait and see approach, this has proved to be an increasingly unsuccessful strategy as the Eurozone has failed to make any economic headway and is being damaged by the persistence of low inflation and lack of growth. The second reason for today’s cuts are to encourage a better take up of the Bank’s Targeted Long Term Refinance Operation, this €400Bn initiative was announced in June and offers funding to banks in specific circumstances at 10 points above the Refi Rate, since this initiative is kicking off in September today is the last chance for the ECB to make it more attractive by lowering the cost to banks of drawing down these funds.

As widely anticipated the ECB President, Mario Draghi, used his press conference to announce some outline details of the banks proposed Asset Backed Securities program. Beginning in October the bank will begin purchasing private assets, including mortgage backed securities, with a view to injecting more liquidity into the market. No details on the size of the program were provided.

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