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Home / Business / The ECB cuts the key policy rate, relaunches QE to boost the eurozone economy

The ECB cuts the key policy rate, relaunches QE to boost the eurozone economy



The European Central Bank delved deep into its toolbox on Thursday, further cutting its deposit rate into negative territory, launching a new round of monthly bond purchases and taking other steps to stimulate a fledgling eurozone economy.

ECB President Mario Draghi's next to last meeting, the central bank, delivered, as expected, a 10-point cut on the deposit rate that banks pay to park excess reserves with it. The move pushed the rate to minus 0.5%.

At a news conference after the decision, Draghi said stubbornly low inflation, which remains well below the ECB's target of close to but just under 2%, was the main driver of the decision.

Draghi said risks to the outlook for the euro area had increased as a result of protracted global trade conflicts and concern over the protracted process involving Britain's exit from the EU. The risk of a recession in the euro area remained "small", he said, but had increased since the ECB's last meeting.

Economists had been less sure whether the ECB would also move to start its quantitative easing program at the September meeting, but policy makers did. The ECB said it would start buying 20 billion euros of securities in the month of November 1

.

Doubts had arisen during the meeting after a handful of ECB officials in public comment and media interviews questioned the need to start asset purchases. Draghi said at a news conference following the decision that there had been broad support for the interest rate cut and an extension of the central bank's future policy on interest rates, but acknowledged more "diversity" of views on relaunching bond purchases. There was still a broad consensus in favor of the whole package.

Furthermore, economists described the ECB's asset purchase plan as "open" QE, with policy makers promising to continue buying "as long as needed to strengthen the accommodative effect of key policy rates" and ending just before the ECB begins raising policy rates.

"Today's decisions have rooted and anchored the Draghi legacy in future ECB decisions." Whatever it takes "has just been extended by" as long as it takes, "said Carsten Brzeski, chief economist at ING Germany, referring to Draghis famous statement from 2012 at the height of the eurozone debt crisis that the ECB would do "whatever it takes" to preserve the euro.

Among other steps taken by the ECB on Thursday, policy makers extended the so-called forward guidance on interest rates, saying they would remain at "current or lower levels" until inflation prospects "robustly" converge with the bank's target inflation rate close to, but below 2%. Earlier, the ECB said it intended to remain at current or lower levels through the first half of next year.

The ECB also made adjustments to its targeted long-term refinancing operations to further stimulate lending, and in an effort to ease the pressure on banks' profitability from a lower deposit rate, it announced that it would introduce a stratified system that would exempt some excess reserves parked by banks with ECB from the negative interest rate.

See: ECB challenge: pushing interest rates further into negative territory without destroying eurozone banks

The decision drew the attention of US President Donald Trump, who has previously accused the ECB of working to undermine dollar. On Thursday, he used the decision as an excuse to base the US central bank via Twitter again:

When asked about the tweet, Draghi responded that the ECB's policy makers "do not target the exchange rate, period. ”

Read: Trump complains that the ECB's exchange rate will hurt the US and Mnuchin does not disagree

The euro

EURUSD, + 0.5087%

fell to a two-year low against the US dollar in the wake of the decision, but rebounded later after a round of US economic data and a news release said the Trump administration officials weighed a temporary trade agreement with China. Pan-Euroepan Stoxx 600 Index

SXXP, + 0.20%

was up 0.2%.

U.S. shares pushed higher, with the S&P 500

SPX, + 0.42%

up 0.5%, while Dow Jones industrial average

DJIA, + 0.35%

rose around 110 points, or 0.4%.

The bond purchase decision sent European bond yields to decline and drag on US government yields. But the return soon returned to positive territory as hopes of trade measures appeared to take center stage. Interest rates and bond prices are moving in opposite directions.


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