ECB moves to boost eurozone economy
December 3, 2015, 3:38 pm

The European Central Bank (ECB) has moved to bolster eurozone economic recovery by cutting a key interest rate and extending its stimulus programme.

The ECB`s overnight deposit rate has been cut to -0.3% from -0.2%, aimed at encouraging banks to lend rather than keep money with the central bank.

In addition, the ECB is extending its monthly €60bn stimulus programme by six months to at least March 2017.

The ECB left its main interest rate unchanged at a record low of 0.05%.

ECB president Mario Draghi told a news conference that its bond-buying stimulus programme, or quantitative easing (QE), was working.

But an extension of QE was needed to tackle prolonged low inflation and get it back towards the ECB`s 2% target, he said.

`Tinkering`

The cut in the interest rate on overnight bank deposits means that banks in effect pay more to the ECB for holding their reserves.

The policy is designed to make it more profitable for banks to offer loans to consumers and businesses, ensuring a free flow of money.

However, most analysts had been expecting the ECB to take more drastic action.

"Draghi has over promised and under delivered," said Patrick O`Donnell, investment manager at Aberdeen Asset Management.

"Everyone was expecting Draghi to be the white knight for Europe once again and he hasn`t really showed up. Today`s measures amount to tinkering around the edges."

Ahead of the announcement, the euro had been weakening. However, when the measures fell short of expectations the euro surged against the dollar, rising more than two cents to above $1.08.

Oil effect

The ECB is tackling low inflation, currently 0.1% and a potential obstacle to stronger growth.

Mr Draghi told the news conference that eurozone inflation for 2016 is expected to reach 1% rather than the 1.1% previously forecast. For 2017, inflation is set to reach 1.6%, down from the previous prediction of 1.7%.

Inflation in the eurozone has been below zero - that is, prices were falling - as recently as September. This has been because of falls in international energy prices, particularly crude oil.

But "core inflation", which strips out volatile food and energy prices, is also low, hovering persistently around 1%.

The latest figure, for November, was down on the previous month.

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