Finland Times

President of the European Central Bank (ECB) Mario Draghi attends a press conference in Frankfurt am Main, on June 5, 2014. The ECB said in a statement that it is lowering all three of its key interest rates, which have been on hold at record lows all this year. Photo AFP / Lehtikuva

The European Central Bank (ECB) on Thursday announced that interest rates of the main refinancing operation, marginal lending facility and deposit facility will be cut to 0.15 percent, 0.4 percent and -0.1 percent respectively.

    

Addressing a press conference following the governing council meeting, the ECB president Mario Draghi said the rate cut was among "a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy".

    

The measures also include targeted longer-term refinancing operations, preparatory work related to outright purchases of asset-backed securities and a prolongation of fixed rate, full allotment tender procedures and suspension of the weekly fine-tuning operation sterilizing the liquidity injected under the Securities Markets Program.  

    

The reductions of interest rates will come into effect on June 11, 2014 and the negative rate will also apply to reserve holdings in excess of the minimum reserve requirements and certain other deposits held with the Eurosystem.

    

For a clear purpose of support bank lending, the ECB put the targeted longer-term refinancing operations (TLTRO) on the table. Draghi explained that counterparties will be entitled to borrow, initially, 7 percent of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchase, outstanding on 30 April 2014.

    

Two successive TLTROs will be conducted in September and December 2014. In addition, from March 2015 to June 2016, all counterparties will be able to borrow, quarterly, up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households for house purchase, over a specific period in excess of a specified benchmark.

    

All TLTROs will mature in September 2018 in around four years. "The cost is low," said Draghi.

    

The ECB decided to extend the existing eligibility of additional assets as collateral, notably under the additional credit claims framework, at least until September 2018. The ECB also pledged to intensify preparatory work related to outright purchases in the Asset Backed Securities (ABS) market.  The Eurosystem will consider purchasing simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector, taking into account the desirable changes in the regulatory environment, and will work with other relevant institutions to that effect, said Draghi.

    

The central bank will continue conducting the Main refinancing operations as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period ending in December 2016.

    

In another development, the ECB has decided to suspend the weekly fine-tuning operation sterilizing the liquidity injected under the Securities Markets Program.

    

The decision of the ECB came at a time when inflation in the euro area in May, according to the Eurostat, is expected to be as low as 0.5 percent.

    

Draghi warned against the risk of prolonged period of low inflation in the euro area. "Together, the measures will contribute to a return of inflation rates to levels closer to 2 percent."

    

With regard to economic growth, the Real Gross Domestic Product in the euro area rose by 0.2 percent, quarter on quarter, in the first quarter of this year. "This confirmed the ongoing gradual recovery, while the outcome was somewhat weaker than expected."

    

According the ECB's projection, the aggregate euro area general government deficit will decline gradually from 3.0 percent of GDP in 2013 to 2.5 percent of GDP in 2014. For 2015 and 2016, a further decline to 2.3 percent and 1.9 percent, respectively, is projected. General government debt is projected to peak at 93.4 percent of GDP this year. Thereafter, it is projected to decline, reaching around 91 percent in 2016.