The ECB signals an interest rate cut, more monetary easing in the future

On Thursday, the European Central Bank (ECB) prepared markets for easing relief measures, which made the euro fall to a two-year low against the dollar.

The central bank said it expects that key rates will remain "at their current or lower level" at least through the first half of 2020, updating the wording of previous statements and suggesting that an interest rate cut could be on the horizon.

ECB President Mario Draghi said at a subsequent press conference on Thursday that "a significant degree of monetary stimulus continues to be necessary to ensure that economic conditions remain very favorable and support the enlargement of the euro area."

The Bank also signaled that may be additional measures to stimulate the euro area economy. It said it examined options, "for example, the design of a tiered reserve remuneration system, and options for the size and composition of potential new net asset purchases."

This means that it can reduce the fee that banks have to pay for. pay to park excess cash with the ECB. It also said it looked at a reintroduction of a quantitative relief program in the coming months. Quantitative relief, or large-scale asset purchases, is where it buys euro area government bonds to further increase lending and increase inflation.

Carsten Brzeski, chief economist at ING Germany, said in a note that "now it looks increasingly as if the September meeting will not just bring a single action, but rather a package of several measures."

The euro hit two -year lows of $ 1[ads1],103 after the ECB's change in guidance, while the German 30-year bond yield hit a record low of 0.167%, according to data from the research firm Refinitiv.

Euro fell to an eight week low after ECB decision.

Draghi also told the reporters on Thursday that "while further employment gains and rising salaries continue to support the resilience of the economy, softer global growth dynamics and weak international trade, the outlook of the euro area is still weighing."


Sintra speech

Draghi warned last month that without a clear improvement for the euro area, the central bank would announce further stimulus measurements. This allowed market participants to increase forecasts for new interest rate cuts or even a bond loan program. Draghi, who spoke in June in Sintra, Portugal, made it clear that his institution was ready to use all necessary measures to rebuild the flagging economy.

Wednesday's data further highlighted the recent weakness and showed German industrial PMIs (purchasing management index)) fell to 43.1 in July from 45.0 in June. At the same time, new orders fell in the country at their fastest pace since July 2012, due to the weakness of Chinese demand and the automotive industry.

The ECB had launched a major stimulus package after the government debt crisis of 2011. This included cuts in interest rates to record low amounts, buy government bonds, and facilitate more lending to banks in the euro area. The bank tried to normalize its policies last year – and obtain other central banks like the US Federal Reserve – but with global trade war and softness in China, most of these banks have now signaled a U-turn. In the US, investors now believe there is an 80% chance that the Fed will announce a 25 basis point cut when it meets next week.

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