MercoPress. South Atlantic News Agency

ECB cuts rates to record low and negative for overnight deposits; Euro/dollar slumps below 1.3

“The newly decided measures...will have a sizable impact on our balance sheet,” anticipated ECB President Mario Draghi

The European Central Bank cut interest rates to new record lows on Thursday, unexpectedly lowering borrowing costs to try to lift inflation from rock-bottom levels (deflation) and support the stagnating euro zone economy. The ECB cut its main refinancing rate to 0.05% from 0.15%.

In addition ECB will purchase a broad portfolio of asset-backed securities and euro-denominated covered bonds.

ECB President Mario Draghi had said after the ECB's last rate cut in June that “for all the practical purposes, we have reached the lower bound”.

In a landmark speech on Aug. 22, however, Draghi said indications from financial markets showed inflation expectations “exhibited significant declines at all horizons” in August.

Euro zone inflation slowed to 0.3% last month, sinking deeper below the ECB's target of just under 2 percent and raising the specter of deflation in the euro zone.

On Thursday, the ECB also said it had lowered the rate on bank overnight deposits to -0.20%, which means banks pay to park funds at the central bank, and cut its marginal lending facility - or emergency borrowing rate - to 0.30 percent.

Markets reacted on Thursday by strengthening the US dollar against most major currencies and rallied versus the Euro.

“The newly decided measures, together with the targeted longer- term refinancing operations which will be conducted in two weeks, will have a sizable impact on our balance sheet,” said ECB President Mario Draghi at the press conference following the ECB Governing Council meeting.

The Euro/dollar rate slumped below the key level of 1.3000, and analysts believe the Euro's trend would be overwhelmingly negative after the rate cut. In effect US economic data released on Thursday was a mix but with an ascending tendency: more jobs, not as many as forecasted, and the US trade deficit narrowed slightly to 40.5 billion U.S. dollars in July from the revised 40. 8 billion in June, reported the Commerce Department.

In late New York trading, the Euro fell to 1.2939 dollars from 1.3145 dollars of the previous session, and the British pound decreased to 1.6334 dollars from 1.6454 dollars. The Australian dollar climbed to 0.9351 dollar from 0.9345 dollar.

The dollar bought 105.23 Japanese yen, higher than 104.84 yen of the previous session. The greenback was up at 0.9325 Swiss franc from 0.9179 Swiss franc, and moved down to 1.0879 Canadian dollars from 1.0886 Canadian dollars.