ECB takes new steps to avoid deflation

Written By THE ASSOCIATED PRESS Posted: 06/05/2014, 02:02am

FRANKFURT, Germany — The European Central Bank on Thursday took a raft of new, unconventional steps, including new cheap loans for banks, to keep the eurozone from sliding into deflation.

The bank earlier in the day cut its main interest rate, the refinancing rate, from a record low of 0.25 percent to 0.15 percent. More drastically, it also cut the rate it pays on money deposited by banks from zero to minus 0.1 percent. That is an unprecedented step for the ECB that aims to push banks to lend money rather than hoard it.

ECB President Mario Draghi told a press conference that on top of those rate cuts, the ECB would:

-Offer long-term loans to banks at cheap rates until 2018. The loans would be capped at 7 percent of bank’s lending to companies.

The targeted loans would be charged a fixed rate, meaning that the rate could not rise over the life of the credits, even if the bank raises its benchmark. That gives banks confidence they have cheap funding out through 2018.

—Start doing “preparatory work” 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 175 billion euros in the financial system that banks could in theory use to lend to each other or to companies.

Draghi also said the ECB’s policymakers unanimously agreed to consider more unconventional measures to boost inflation if it stays too low. That’s important because it shows that Germany’s Bundesbank is on board with the new package of measures. At last measure, inflation was 0.5 percent, far below the ECB target of 2 percent.

Stocks rose and the euro fell on the announcements. Germany’s DAX stock index rose above 10,000 for the first time. The euro fell to $1.3515 from about $1.3600.

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