ECB takes steps to avoid deflation

The European Central Bank (ECB) on Thursday reduced interest rates and took several unconventional steps to prevent the 18-country eurozone from slipping into a period of deflation that could trip modest economic recovery, AP reported.

The ECB's steps are aimed at increasing inflation and easing the flow of credit in an economy where lending remained weak. These include cheap, long term loans to banks, on the understanding that the money would be loaned to businesses, boosting growth.

Further for the first time ever, it took the untested step of imposing a negative interest on money it received from banks, from zero to minus (-)0.1 per cent.

This would encourage lenders to lend the money, not hoard it. The central bank also reduced its main interest rate, the refinancing rate, from 0.25 per cent to 0.15 per cent.

The actions helped European stock markets rally and led to a further fall in the value of the euro.

According to ECB president Mario Draghi who spoke at a press conference, the central bank would offer long-term loans to banks at cheap rates until 2018. The targeted loans would be charged a fixed rate, meaning there would be no increase in the rate, even if the ECB raised its benchmark.

Meanwhile, US stocks were up to records ahead of Fridays' employment report, even as European equities and euro-area bonds advanced on optimism that new European Central Bank stimulus would boost economic growth.

The Standard & Poor's 500 Index rose  0.6 per cent to a record at 4 pm in New York even as the Russell 2000 Index of small companies rallied to the highest since April after hedge-fund manager David Tepper expressed renewed confidence in US equities.

The Stoxx Europe 600 Index added 0.4 per cent to close near a six-year high, and Germany's DAX Index was up over 10,000 for the first time. The yield on Italy's two-year note was down to a record low. Gold was up at the most in three weeks.

Bloomberg quoted Chad Morganlander, a fund manager Stifel Nicolaus & Co, which overseas $160 billion from Florham Park, New Jersey, as saying Mario Draghi was taking a sledgehammer to the disinflationary environment in the euro zone. He added his actions were well beyond expectations.