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Draghi trumps with trio of rate cuts

Thursday, September 04, 2014 - 02:06

The ECB surprises markets by cutting its three main rates and announcing a programme to buy asset-backed securities and covered bonds. Has 'Magic Mario' pulled another rabbit out of the hat? David Pollard reports.

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It's a European recovery of ups and - more recently - downs. Mario Draghi had already ramped up speculation of a big gesture. But few expected such a big package of rate cuts...and more. SOUNDBITE (English), MARIO DRAGHI, ECB PRESIDENT: ''The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities ..... In parallel, the Eurosystem will also purchase a broad portfolio of euro-denominated covered bonds issued by MFIs domiciled in the euro area under a new covered bond purchase programme.'' All three main rates were cut by 10 basis points each. The refi now stands just five above zero - the marginal lending is down - and the deposit rate even deeper in negative territory. Earlier, Chairman of the Eurogroup, Jeroen Dijsselbloem pointed to a darkening mood in the eurozone. Geopolitical risks, particularly over Ukraine, compounded by another worry: sinking prices. (SOUNDBITE) (English) CHAIRMAN OF THE EUROGROUP OF EURO ZONE FINANCE MINISTERS JEROEN DIJSSELBLOEM: "I don't actually see deflationary risks but I do see the risk of a long term very low inflation which has to be broken through and as I said before it is a joint responsibility for all of the euro zone, as well as the politicians as the bankers." And elsewhere, weak demand persists, according to ING's Carsten Brzeski. SOUNDBITE (English), CARSTEN BRZESKI, ECONOMIST, ING: ''It's not so much the geopolitical risks, but it is the stagnation in France, in Italy and this stagnation is going to last for a while because these countries need to implement structural reforms and as we know implementing these reforms is going to take time.'' Draghi told his news conference that structural reform needed to gain momentum. In the meantime, the asset purchase programme will have a ''sizeable impact'' on the ECB balance sheet. It could, it's thought, amount to half a trillion euros. The decisions were not unanimous - but a ''broad'' asset purchase programme - or full-blown QE - was discussed. With Draghi warning rates are now at their ''lower bound'', it looks more and more likely to be next weapon in the ECB armoury.