By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — Europe’s major central banks delivered a further round of monetary stimulus in the face of a deepening slowdown Thursday, with the European Central Bank cutting its key lending rate to a record low and the Bank of England embarking on additional quantitative easing.
The moves came as China’s central bank surprised markets by cutting its benchmark lending and deposit rates. Market Pulse: People’s Bank of China cuts lending, deposit rates .
The ECB said its governing council voted to cut its key lending rate by a quarter of a percentage point to 0.75%, taking it below 1% for the first time in the central bank’s history.
The central bank also cut the deposit rate, which it pays on funds parked at the ECB overnight, to 0% from 0.25% and lowered the rate on its marginal lending facility from 1.75% to 1.5%. The moves were in line with expectations.
The cut in the refi rate “is welcome news for the [peripheral] banks in the euro area that rely heavily on ECB funding,” said Martin Van Vliet, an economist at ING Bank. “And to the extent that it contributed to the easing in Euribor rates in anticipation of today’s rate cut, it also helps homeowners with variable-rate mortgages, which, incidentally, are the most common type of mortgage product issued in Spain.”
The euro EURUSD -0.91% traded at $1.2464, down 0.4% on the day and from $1.2511 ahead of the announcement.
Investors will now turn to ECB President Mario Draghi’s monthly news conference at 2:30 p.m. Frankfurt time, or 8:30 a.m. Eastern, for any clues to additional steps monetary-policy makers are prepared to take as the euro-zone debt crisis takes a deepening toll on the region’s economy.
Earlier, the Bank of England’s Monetary Policy Committee voted in London to boost the size of its asset purchases by 50 billion pounds ($78.1 billion), bringing the total size of the program to £375 billion. The bank said it expected the purchases to take four months to complete.
“U.K. output has barely grown for a year and a half and is estimated to have fallen in both of the past two quarters. The pace of expansion in most of the United Kingdom’s main export markets also appears to have slowed. Business indicators point to a continuation of that weakness in the near term, both at home and abroad,” the bank said in a statement accompanying the decision.
The central bank said policy makers welcomed the U.K. Treasury’s recently announced “funding for lending” program but warned that continuing tight credit conditions and fiscal consolidation meant that inflation was likely to undershoot the bank’s 2% annual target without additional monetary stimulus.
The MPC also left the bank’s main lending rate unchanged at a record-low 0.5%, where it’s stood since March 2009.
The British pound GBPUSD -0.18% traded at $1.5590 versus the dollar, little changed from Wednesday but up from $1.5566 ahead of the BOE and Chinese central-bank announcements.
While the ECB has yet to join the Bank of England, Federal Reserve and Bank of Japan in conducting outright quantitative easing, the cut takes the central bank into uncharted territory.
The Bank of England first launched quantitative easing in March 2009. The central bank revived the dormant program last October, approving a round of purchases that took until May to complete.
The central bank then went back on hold, but minutes of its June meeting revealed just a 5-4 majority in favor of staying on the sidelines. A further deterioration in the economic outlook since that time was likely enough to spur Thursday’s decision to approve a further round of purchases, economists said.
Howard Archer, chief U.K. economist at IHS Global Insight, said a weak June reading of the purchasing managers index was particularly likely to have moved MPC members to act. Surveys pointed to further contractions in activity in the manufacturing and construction sector, while services eked out only modest growth.
Overall, the readings pointed to the risk of a further contraction in gross domestic product in the second quarter, he noted. At the same time, inflation continues to fall, while oil prices are in retreat, blunting a concern that could potentially have stood in the way of action, economists said.
“The oil price fell by about 20% during [the second quarter of the year], and this, together with the government’s announcement of a postponement of the rise in fuel duty planned for August, has led us to mark down significantly our inflation forecast for the remainder of this year. We now expect inflation to return to target in [the second half], a more rapid decline than the Bank of England had forecast in its May Inflation Report,” said Simon Hayes, U.K. economist at Barclays.
The ECB moved as survey data showed the region’s slowdown pushing into the euro zone’s core, including Germany.
“With the euro zone’s debt crisis intensifying again and the economic downturn deepening and broadening, we agree with the consensus view that the ECB will cut interest rates by 25 basis points today,” wrote strategists at Capital Economics in London in advance of the central-bank announcements. “But the bank seems unlikely to announce more long-term lending, believing that the financial system as a whole has enough liquidity.”
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
