Channel NewsAsia

Euro slumps after ECB cuts rate, announces asset purchases

The euro slumped to less than US$1.30 on Thursday (Sep 4) after the European Central Bank surprised markets with a rate cut, and said it would launch an asset-buying programme to ward off deflation.

LONDON: The euro slumped to less than US$1.30 on Thursday (Sep 4) after the European Central Bank (ECB) surprised markets with a rate cut, and said it would launch an asset-buying programme to ward off deflation. The euro fell to the lowest levels for more than a year against the dollar, down to US$1.2996, the lowest since July 15, 2013 and the first time below US$1.30 since that date.

The ECB pared back its key interest rates to new all-time lows to ward off deflation, and it also cut growth forecasts. The head of the ECB, Mario Draghi, also said at a later press conference that the bank would launch a programme to purchase asset-backed securities, a major policy development which the markets had expected.

The bank would launch further measures if needed to ward off the threat of deflation, he assured, while also revealing that the bank had cut its eurozone growth forecasts for this year and next. Against a background of growing concern that the single currency area is on the verge of dangerous spiral of falling prices, the ECB cut its central "refi" refinancing rate to 0.05 percent from 0.15 percent.

It also lowered the deposit rate to minus 0.20 percent from minus 0.10 percent and trimmed its marginal lending rate to 0.30 percent from 0.40 percent, it said in a statement. Few analysts had expected any further rate cuts this month, arguing that, with eurozone borrowing costs already at record lows, a cut would not prove particularly effective.

The ECB cut its forecasts for growth in the 18-country euro area this year and next year, and also lowered its projection for area-wide inflation. The ECB is pencilling in gross domestic product (GDP) growth of 0.9 percent in 2014 and 1.6 percent in 2015, said Draghi. "Compared with our projections in June, the projections for real GDP growth for 2014 and 2015 have been revised downwards," he said.

Tweet photos, videos and updates on this story to  @channelnewsasia