ECB interest rate decision - as it happened June 5, 2014

Shock and awe tactics were expected from Draghi after months of hints, and he didn’t disappoint, throwing in everything but the kitchen sink of QE.

Cutting the refinance rate and imposing negative deposit rates are positive steps, but the real game changers are the credit easing measures which will boost liquidity in the Eurozone, and reduce borrowing costs in the periphery. A European-style Funding for Lending scheme has long been called for, and its creation should help stimulate job growth.

Fears of deflation and stuttering growth have given the ECB little option but to act, as lower PMIs and the strength of the euro continued to cause concern. However, confidence among companies in the Eurozone suggests we are over the worst, and although the fragile recovery across the bloc seems to be slowing, the economy is not contracting.

In this context, these measures should help boost inflation, and are important to bringing a healthy glow back to the region’s economy. If an even more sizeable shot in the arm is required, Draghi still has the much hinted about QE remaining up his sleeve.

14.55 And now for some more analysis.

Fixed income investment manager Luke Bartholomew commented:

It’s now hard to say that Draghi is all talk and no action. He has effectively thrown the kitchen sink at the threat of Eurozone deflation.

This is a pretty comprehensive and punchy set of measures and he’s made clear he’s willing to do more if necessary. He’s clearly committed to reviving a simple ABS market and ending the sterilisation of its bond buying programme is arguably a form of ‘QE-lite’. Both could well have an impact alongside a new LTRO targeted towards expanding bank lending to the private sector, and markets will take them seriously.

Draghi’s inaction up to now has probably been because he’s been trying to build consensus on the council for what will have been contentious measures. While this may have allowed inflation to fall to a dangerously low level, it meant he was able to announce unanimous support for the policy today, which lends credibility to the measures.

Today’s measures will spur investors to continue the hunt for yield and asset classes like equities, emerging market debt and peripheral markets are likely to perform well while the euro should struggle.

14.45 Let's take a look at the markets now that Dragi's press conference is over. The euro has weakened against the pound over the course of the day. Meanwhile, the euro has fallen against the dollar but has clawed back some of its losses.

^{The euro is strengthening against the pound. Graph: Bloomberg}

^{The euro has fallen against the dollar but has clawed back some of its losses Graph: Bloomberg}

14.30 Mario Draghi's press conference has just finished. Here are some more of the highlights, from Reuters:

ASKED IF POTENTIAL FOREIGN DEMAND FOR ABS RISKED PUSHING UP THE EURO

"We are working on the ABS but there are other actors that also need to work on this, there needs to be a revisitation of the regulation ... to eliminate some of the undue discriminations against this specific product when this product is simple, real and transparent.

"If this effort ... were to produce a product that is so attractive for the world that it means there will be a very sizeable financing inflows for the SMEs in the real economy that would be the greatest success and for us in Europe, would help restore a one capital market and to fight fragmentation, which is one of the most important causes of the present crisis.

"I would value these benefits much more than the exchange rate."

ON THE EURO

"One of the reasons for the strengthening exchange rate was inflows coming from outside, from investors interested in euro area economies, and that has moderated ... in the last quarter."

HOW LONG FOR TODAY'S MEASURES TO TAKE EFFECT?

On monetary policy aspect and reaffirming forward guidance:

"Interest rates will stay low for long, possibly longer than previously foreseen, and this will feed into the money market conditions."

When will there be some outcome? "Most likely we will see immediate effects on the money markets and we will see delayed effects on the real economy attributable to this programme ... (this) will probably take three or four quarters."

14.28 Commenting on today’s ECB move, Neil Williams, Chief Economist, Hermes Fund Managers, says:

Today’s ECB moves are a step in the right direction, but look too little, too late to snuff out deflation-risk and kick-start growth.

14.27 French President Francois Hollande praised the decision by the ECB to cut its interest rate to a record low in a fight against the threat of deflation.

^{French President Francois Hollande}

Speaking at a closing news conference at the G7 summit in Brussels, he said:

I would like to congratulate the decision made today by the European Central Bank to cut rates and improve the financing of the economy"

The ECB became aware that the danger is not inflation, it is deflation, it is the risk that the economy does not recover and that states can no longer secure financing.

Finance must be at the service of the economy in order to encourage growth," the French leader said.

The French economy is struggling and ministers of Hollande's socialist government have blamed a strong euro and tight monetary policy by the ECB for the sluggish growth.

14.25 Draghi has said the ECB governing council is "unanimous and determined" to take any action within its mandate to preserve price stability

14.18 More from the New York Times' Binyamin Appelbaum

14.17 Draghi has just said:

The concerns of the savers should be taken very seriously here....these are people who have signed insurance policies and they see the value of these insurance policies going down. These concerns are serious. Interest rates will go up when the recovery will come back, when growth will come back.

14.15 A comment from Binyamin Appelbaum, Washington correspondent for The New York Times.

14.12 Some highlights from the Q&A with Mario Draghi so far, from Reuters:

COUNCIL POLICY DECISION

"This time it was unanimous."

ARE WE FINISHED? NO!

"We've done this. We think it's 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."

LOWER BOUND OF INTEREST RATES

"For all practical purposes I would consider having reached the lower bound (of interest rates) today."

ABS and MROs

"ABS preparatory work ... "under this initiative the euro system will consisder purchasing simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector".

"We decided to continue conducting the MROs as fixed-rate tender procedures with full allotment for as long as necessary and at least until the end of the reserve maintenance period ending in December 2016."

14.10 Reaction from The Telegraph's Ambrose Evans-Pritchard

14.05 Now Draghi's speech has finished and the Q&A has begun. Draghi hints at the possibility of further radical action, saying:

We are not finished here

14.00 Another summary of points made by Draghi, from Reuters:

TLTROs

"All TLTROs will mature in September 2018 ... counterparties will be entiteld to borrow, initially, seven percent of the total amount of their loans to the euro area non-financial private sector, excluding loans to households for house purchases...

"The combined initial entitlement amounts to 400 billion euros. To that effect two successive TLTROs will be conducted in September and December 2014.

"In addition, from March 2015 to June 2016 all counterparties will be able to borrow quarterly up to 3 times the amount of their net lending to the euro area non-financial private sector, excluding loans to households for house purchases."

MORE ON PACKAGE OF MEASURES

"This package includes further reductions in the key ECB interest rates, targeted longer-term refinancing operations, preparatory work related to outright purchases of asset-backed securities and a prolongation of the fixed rate full allotment tender procedures. In addition, we have decided to suspend the weekly fine-tuning operation sterilising liquidity injected under the securities market programme."

ONGOING MODERATE ECONOMIC RECOVERY

Quarter-on-quarter in the second quarter of 0.2 percent "confirmed the ongoing gradual (economic) recovery ... The most recent survey results signal moderate growth also in the second quarter".

"...the risks surrounding growth prospects continue to be on the downside."

^{Draghi speaking at the press conference}

13.55 The euro continues to fall to fresh four month lows against the dollar, which is what the ECB wants

^{Euro vs dollar at 2pm Graph: Bloomberg}

13.50 What has surprised the market is that Draghi looks to be considering QE - purchases of "asse-backed securities" as he calls it - as part of the measures.

This is how some have reacted to the announcement:

13.48 Some important points from Draghi's speech so far, from Reuters:

SWIFT ACTION IF NECESSARY

"If required, we will act swiftly with further monetary policy easing. The Governing Council is unanimous in its commitment to using also unconventional instruments within its mandate should it become necessary to further address risks of too prolonged a period of low inflation."

PACKAGE OF MEASURES

"We decided on a combination of measures ... to support lending to the real economy. This package includes further reductions in the key ECB interest rates, targeted longer-term refinancing operations, preparatory work related to outright purchases of asset-backed securities and a prolongation of the fixed-rate full allotment tender procedures."

FORWARD GUIDANCE

"Concerning our forward guidance, the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation."

13.45 More from Draghi: "Although labour markets have shown some further signs of improvement, unemployment remains high in the euro area"

^{Mario Draghi, president of the European Central Bank}

13.40 Mario Draghi has startted speaking. He has said:

We will act swiftly with further action if needed

13.25 Banks will have to pay to store money with the eurozone's central bank as Mario Draghi attempts to encourage lending, reports The Telegraph's James Titcomb

13.30 Schroders' European Economist Azad Zangana comments:

As widely expected, the European Central Bank has cut its main policy interest rate in a bid to fend off the rising risk of deflation in the Eurozone.

More information will follow from the press conference, but given the ECB has cut the deposit rate, it should also announce more liquidity of some form.

We have disagreed with the move to cut the deposit rate in the past, as we expect banks to simply pass on the costs to households and businesses, either by charging fees for savers, but more likely through higher interest rates on new borrowers - the opposite of what the ECB is trying to achieve. We await to hear what else Mario Draghi will announce.

13.25 The ECB has issued a statement on their website.

"Further monetary policy measures to enhance the functioning of the monetary policy transmission mechanism will be communicated in a press release to be published at 3.30 p.m. CET today," the ECB said in a statement.

The ECB has:

• Lowered the deposit rate to -0.1pc, meaning it will effectively charge banks for holding their money overnight. I

• Cut its main refinancing rate to 0.15pc

• Reduced the marginal lending rate - or emergency borrowing rate - to 0.4pc.

13.20 One equities trader says that the market is waiting for the further measures from the ECB that will be announced later, adding that "so far Draghi has not overdelivered". The FTSE 100 is flat at 6,819.

13.10 Chief Market Strategist at CityIndex Joshua Raymond said:

13.05 Back in London, the benchmark FTSE 100 has been volatile since the announcement but is currently up 6 points to 6,824. With the ECB decision meeting many traders’ expectations, the rate cuts will already have been priced into the market. All eyes will now be on the forthcoming press conference.

13.00 The euro is weaker against the pound following the ECB's announcement

^{The euro weakens against the pound Graph: Bloomberg}

Meanwhile, the euro weakened against the dollar

^{The euro weakens against the dollar Graph: Bloomberg}

12.50 The FTSE100 is almost unchanged at 6819 as investors digest the news

12.45 As expected, the ECB has cut its base interest rate from 0.25pc to 0.15pc and its deposit facility to -0.1pc. Banks will now have to pay to leave money in the ECB.

^{The European Central Bank will announce its interest rate at 12.45 today}

12.25 Turning back to the main event of the day - that is, Mario Draghi's announcement on the ECB's interest rates - here is some more analysis from Bank of America Merrill Lynch

They expects the ECB to:

• Cut the refi- or refinancing rate - and the deposit rate to +10 basis points and -10 basis points respectively, with a view of capping the exchange rate appreciation

• Announce a term funding scheme that would differ from the previous LTROs: it would be conditional on lending, the rate would be fixed, it would be open over a definite period... This would be an announcement of liquidity but the implemented liquidity injection would actually take weeks if not months to materialise given the conditionality

• Overall, we think markets may cheer up on Draghi communication, then deflate a little bit when markets realise the liquidity is not out there yet

12.15 Capital Economics give their analysis on the Bank of England's interest rate decision:

While the strength of the economic recovery may have pushed one or two MPC members closer to voting to raise interest rates at today’s meeting, we still think that the benign inflation outlook and a cooling of the housing market will persuade most members to keep rates on hold well into 2015

12.10 Commenting on the Bank of England's decision on interest rates, Reuters say:

The Bank of England stuck to its plan to nurse the economy back to full health with record low interest rates on Thursday, despite strong growth and fast-rising house prices.

As widely expected, the Bank's Monetary Policy Committee left its benchmark interest rate at 0.5 percent, its level since the worst of the financial crisis more than five years ago.

12.00 The Bank of England has kept its interest rate at a record low of 0.5pc despite strong growth and a hot housing market

^{The Bank of England}

11.58 Let's hear from some of the analysts.

Chris Williamson, chief economist at Markit, said last night:

Despite falling, the Eurozone PMI remains firmly in expansion territory and consistent with GDP rising by a reasonable 0.4pc in the second quarter.

Although the eurozone is enjoying its best performance for three years, this is an uneven, stuttering and lacklustre recovery.

Capital Economics warned this week:

There is a real and growing danger that the euro-zone enters a Japanese-style bout of flat or falling prices. But even a prolonged period of low positive inflation would seriously hamper the peripheral countries’ efforts to restore their public finances to health.

Kathleen Brooks of forex.com said on Wednesday:

It feels like Christmas Eve just without the mince pies, in dealing rooms across the globe.

The ECB President’s oratory has worked magic in the past, however, with so much expected from this meeting, swathes of the market now expect the ECB to disappoint...

However, we can never rule out a surprise from Draghi, and if the inflation outlook is deemed weak enough to justify QE then the euro could go into free-fall, particularly against the dollar and the pound.

11.55 Earlier this morning, the euro was strengthening against the pound and the dollar.

^{Euro strengthens against the pound in early trading. Graph: Bloomberg}

^{Euro is stronger against the dollar in early trading. Graph: Bloomberg}

1.45am. Good morning and welcome to the live blog. Today Mario Draghi will make his much anticipated announcement about the European Central Bank's interest rates at 12.45pm and then explain his actions - or inaction - at 1.30pm.

Analysts speculate that he will impose negative interest rates on overnight depositors, hoping to spur banks into lending instead and to prevent the eurozone slipping into deflation.

The Bank of England will also announce its interest rates at 12 midday.

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