(Fixes formating glitch in 6th paragraph)
* ECB cuts refi rate to 0.05 pct, deposit rate to -0.20 pct
* Commits to an ABS and covered bonds purchase programme
* Cuts inflation and growth forecasts for 2014
* Draghi says decisions were not unanimously supported
* Draghi says ECB will go further if necessary
By Eva Taylor and Paul Carrel
FRANKFURT, Sept 4 The European Central Bank cut
interest rates to a fresh record low on Thursday and launched a
new scheme to push money into the flagging euro zone economy.
In a series of measures underscoring growing concern about
the currency bloc's health, the ECB cut its main refinancing
rate to 0.05 percent from 0.15 percent previously and drove the
overnight deposit rate deeper into negative territory, now
charging banks 0.20 percent to park funds with it.
The euro zone flatlined in the second quarter of the year
and the Ukraine crisis is now weighing heavily on business
"The Governing Council sees the risks surrounding the
economic outlook for the euro area on the downside," ECB
President Mario Draghi told a news conference.
"In particular, the loss in economic momentum may dampen
private investment, and heightened geopolitical risks could have
a further negative impact on business and consumer confidence."
New ECB economic forecasts predicted slower growth this
year, of just 0.9 percent, picking up to 1.6 percent in 2015.
The forecast for inflation, now running at just 0.3 percent,
was cut to 0.6 percent, rising to 1.1 percent in 2015, still way
below the ECB's target of close to but below 2.0 percent.
Draghi said if inflation looked like staying too low for too
long, the ECB Governing Council was unanimous in its commitment
to using other "unconventional instruments" - a phrase taken as
code for printing money as the U.S. Federal Reserve and Bank of
He added that Thursday's decisions were not supported
unanimously by his colleagues although there was a "comfortable
Draghi also announced plans for an asset-backed securities
(ABS) and covered bond purchase programme to help ease credit
conditions in the bloc. Sources told Reuters it could amount to
500 billion euros ($650 billion) over three years.
Asset-backed securities are created by banks pooling
mortgages and corporate, auto or credit card loans and selling
them to insurers, pension funds or now even the ECB.
Covered bonds are similar instruments but the underlying
assets are ringfenced so if the bank goes bust, the assets are
still there. That makes them safer than ABS where the underlying
loans are not ringfenced.
"At the margin, (the cuts) may have some small positive
effect on bank lending and activity and perhaps give the euro
another downward nudge," said Jonathan Loynes, chief European
economist at Capital Economics.
"But these moves are no substitute for the much more
powerful policy action which looks increasingly necessary to
prevent a renewed recession."
QE OR NOT QE
For investors and markets, the only gambit that will make a
big difference is a large-scale U.S.-style asset purchase, or
quantitative easing, programme that buys government debt with
Draghi ramped up expectations when, departing from the text
of a speech, he told the Jackson Hole central bankers'
conference on Aug. 22 that markets had indicated inflation
expectations showed "significant declines" in August.
Then, he said the ECB's Governing Council would, within its
mandate, "use all the available instruments" to deliver price
stability over the medium term.
Though other central banks have printed money in vast
amounts, some members of the ECB's 24-member policymaking
council are resistant. An ECB source told Reuters last week that
"the barrier to QE is still very high".
What is more, the ECB will want to see the impact of a
four-year loan offer to banks, announced in June but only
launching later this month, before taking the ultimate step.
The interest rate cut will make the upcoming loan offer, or
TLTRO, more attractive as banks can now get the funds for less.
But with lending still impaired, the wider impact is uncertain.
Draghi also expanded on his call in Jackson Hole for
governments to use fiscal policy - more government spending -
and economic reforms to support the euro zone economy.
He said euro zone countries should use existing flexibility
within its debt rules, rather than break them, in order to help
pursue structural economic reforms.
"There is also leeway to achieve a more growth-friendly
composition of fiscal policies," he said.
(1 US dollar = 0.7680 euro)
(Additional reporting by John O'Donnell; Writing by Mike
Peacock; Editing by Ruth Pitchford)