ECB hurls cash at sluggish euro zone economy

ECB hurls cash at sluggish euro zone economy

FRANKFURT - 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.

Draghi outlined a four-year 400 billion euro (324.2 billion pounds) scheme giving banks that have been holding back credit due to looming stress tests an incentive to increase lending to businesses in the euro zone.

"Now we are in a completely different world," Draghi said, citing "low inflation, a weak recovery and weak monetary and credit dynamics".

The package, adopted unanimously, was aimed at increasing lending to the "real economy", he said.

Other steps included extending the duration of unlimited cheap liquidity for euro zone banks, injecting about 170 billion euros by stopping tenders that withdrew funds spent on past government bond purchases, and preparing for possible future purchases of asset-backed securities to support small business.

Projections published by the ECB showed inflation would be just 0.7 percent this year, 1.1 percent next year and 1.4 percent in 2016, a downward revision and far below the ECB's target of below-but-close-to 2 percent.

"If required, we will act swiftly with further monetary policy easing," he said, adding that the policy-setting Governing Council was unanimous in its commitment to use unconventional instruments if needed "to further address risks of too prolonged a period of low inflation".

Most of the measures had been widely anticipated. The euro initially fell to a four-month low of $1.3505 after Draghi's statement before recovering to trade above $1.3600, slightly up on the day. European shares rose and yields on the government bonds of stressed euro zone countries fell.

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