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ECB cuts interest rate to 0% and offers banks free money to try and revive the European economy

The bank also cut the deposit rate facility to -0.4 per cent

Hazel Sheffield
Thursday 10 March 2016 13:59 GMT
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Mario Draghi said there should be no doubt about the ECB’s determination to raise inflation
Mario Draghi said there should be no doubt about the ECB’s determination to raise inflation

The European Central Bank has cut the benchmark interest rate to 0 per cent, from 0.05 per cent, in a bid to revive the slow European economy.

The bank also cut the deposit rate facility to -0.4 per cent, which means it will cost banks more to hold cash rather than to lend it out to customers.

The ECB has decided to boost its quantitative easting programme by €20bn, to €80bn per month starting in April.

Analysts viewed the measures as a shot to the arm of the European economy, with lower interest rates to stimulate borrowing and charges on banks keeping money in their vaults.

Here are the full details of latest measures announced by the Monetary Policy Committee of the ECB:

(1) The interest rate on the main refinancing operations of the Eurosystem will be decreased by 5 basis points to 0.00%, starting from 16 March 2016.

(2) The interest rate on the marginal lending facility will be decreased by 5 basis points to 0.25%, with effect from 16 March 2016.

(3) The interest rate on the deposit facility will be decreased by 10 basis points to -0.40%, with effect from 16 March 2016.

(4) The monthly purchases under the asset purchase programme will be expanded to €80 billion starting in April.

(5) Investment grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases.

(6) A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.

This last measure, TLTRO, is a long-term refinancing option. It allows banks around Europe to borrowly cheaply from the ECB. Interest rates for these loans could be as low as the deposit rate. Now that rate has been cut to -0.4 per cent, it means that the ECB is effectively paying banks to borrow its money.

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