Draghi sets negative rate on ECB deposits

Unprecedented move designed to force banks to lend more to real economy

Mario Draghi, president of the European Central Bank, speaks during a news conference where he unveiled historic measures to face down inflation in Frankfurt. Photograph: Martin Leissl/Bloomberg

Mario Draghi, president of the European Central Bank, speaks during a news conference where he unveiled historic measures to face down inflation in Frankfurt. Photograph: Martin Leissl/Bloomberg

Fri, Jun 6, 2014, 00:55

European stock markets and Wall Street rallied as European Central Bank president Mario Draghi introduced a swathe of measures to boost the economy and held out the prospect of more if the intervention does not work.

The move is designed both to nudge inflation higher to avert the risk of deflation and to increase economic growth in the euro zone.

Asked about large-scale asset purchases in the mode US-style quantitative easing, Mr Draghi said that remained a possibility if the ECB saw a requirement for further action.

“If need be, within our mandate, we aren’t finished here,” Mr Draghi said as he pledged to keep interest rates at a record low for an extended period.

While previous radical moves to stabilise the euro zone have antagonised German representatives on the ECB governing council, Mr Draghi said yesterday’s decision was unanimous.

The new measures include a negative interest rate on money banks hold on deposit with the ECB, a move aimed at encouraging them to increase lending into the real economy.

The deposit rate now stands at minus 0.1 per cent, a first for a major central bank.

The German DAX index climbed to an all-time high following the intervention, before scaling back. In the US meanwhile, the S&P 500 touched an intraday record high for the seventh time in eight trading sessions.

Mr Draghi also unveiled an four-year scheme to funnel new lending to small and medium-sized firms via banks. An initial €400 billion will be made available in September and December.

Targeted scheme

Banks will be allowed under the targeted scheme to borrow an initial 7 per cent of their total euro area non-financial lending, excluding mortgage lending for house purchases. Based on their net lending, participating banks will also be allowed increase the drawdown of support from March 2015 until June 2016. However, the ECB has offered no guidance as to potential increase in lending beyond the initial €400 billion.

While the initiative is modelled on previous longer-term financing operations, it will be of longer duration and will be specifically cast to boost private sector euro zone lending.

The ECB is prolonging the availability of unlimited liquidity for weakened banks, keeping some €170 billion circulating in the banking system.