ECB hurls cash at sluggish euro zone economy, says not done yet

Thu Jun 5, 2014 7:00pm EDT
 
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By John O'Donnell and Eva Taylor

FRANKFURT (Reuters) - The European Central Bank cut interest rates to record lows on Thursday, launched a series of measures to pump money into the sluggish euro zone economy, and pledged to do more if needed to fight off the risk of Japan-like deflation.

For the first time, the ECB will charge banks for parking funds at the central bank overnight in an attempt to force them to lend to small- and medium-sized businesses.

The measures were also aimed at easing pressure on the strong euro, which is threatening economic recovery and importing disinflation.

Euro zone inflation has been stuck in what Draghi has called "the danger zone" below 1 percent since October, mainly because of weaker commodity and food prices, but also because of wage and other adjustments in euro zone crisis countries.

The bank stopped short of full-fledged quantitative easing (QE) - printing money to buy assets - but ECB President Mario Draghi said more action would come it necessary. Asked why the ECB had not gone ahead with QE, he told a news conference:

"We think (what we've done is) a significant package. Are we finished? The answer is no. We aren't finished here. If need be, within our mandate, we aren't finished here."

RBS economist Richard Barwell said this comment would fuel market expectations for more action:

"We doubt the knee-jerk response to further bad news will be 'give the June package more time'; expectations of a broad-based asset purchase programme will rapidly start to build," he said.   Continued...

 
The headquarters of the European Central Bank (ECB) are pictured in Frankfurt June 6, 2013.    REUTERS/Ralph Orlowski