Sat, Mar 07, 2015 - Page 13 News List

ECB must cut its deposit rate, Standard Bank says

Bloomberg

The European Central Bank (ECB) will have to cut its deposit rate further to ensure enough government bonds are eligible for purchase under its sovereign-debt purchase program, Standard Bank PLC said.

ECB President Mario Draghi said in Nicosia, Cyprus, on Thursday that the central bank’s 1.1 trillion euro (US$1.2 trillion) quantitative easing plan will not include debt with yields below its minus-0.2 percent deposit rate. At minus-0.209 percent, the rate on German two-year notes is already below that threshold, while the yields on equivalent Belgian, Austrian and Dutch securities are all within seven basis points of the level.

“There’s a good chance that lower bond yields force the ECB to cut policy rates again — at least the deposit rate,” Steve Barrow, the London-based head of G10 strategy at Standard Bank, wrote in an e-mailed note. “The ECB could be forced to drop the deposit rate in order to widen the bond universe to keep on track with its bond buying plan.”

The ECB last cut its deposit rate in September last year. Central bank officials maintained interest rates at record lows at a policy meeting on Thursday, holding the key refinancing rate at 0.05 percent.

In Asian trading yesterday, the euro remained stuck at 11-year lows after the ECB said it would launch its massive stimulus program next week.

Draghi told a news conference that from Monday the bank would buy 60 billion euros of private and public bonds each month for at least 18 months in a bid to ward off deflation.

He also said it had increased its eurozone growth forecast for this year to 1.5 percent, followed by 1.9 percent next year and 2.1 percent in 2017.

At the same time he forecast inflation at zero this year, lower than previously projected, but added it would pick up to 1.5 percent next year and to 1.8 percent in 2017.

The news pushed the euro below US$1.10 in New York for the first time since September 2003, before it recovered slightly to close at US$1.1028 on Thursday.

Yesterday in Tokyo it bought US$1.1015, well down from levels of about US$1.12 at the beginning of the week.

The single currency also bought ¥132.35 compared with ¥132.50 in US trade.

Additional reporting by AFP

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