The European Central Bank delved deep into its toolbox on Thursday, further reduced its deposit rate to negative territory, started a new round of monthly bond purchases and took other measures to stimulate a fledgling euro area economy.
During outgoing ECB President Mario Draghi's second last meeting, the central bank, as expected, delivered a 10-point cut to the deposit rate that banks pay to park surplus reserves with it. The move pushed the rate to minus 0.5%.
At a news conference following the decision, Draghi stubbornly said low inflation, which remains well below the ECB's target of close but just below 2%, was the main driver of the decision.
Draghi said risks to the euro area outlook had increased as a result of protracted global trade disputes and concerns over the protracted process involving Britain's exit from the European Union. The risks 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 restart its quantitative easing program at the September meeting, but decision makers did so. The ECB said it would start buying € 20 billion a month of securities from November 1
Doubts had arisen at the end of the meeting after a handful of ECB officials, in public comments and media interviews, had questioned the need to restart 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 forward rates, but acknowledged more "diversity" views on relaunching bond purchases. There was still a broad consensus in favor of the whole package.
In addition, economists described the ECB's asset purchase plan as "open" QE, with policy makers promising to continue buying "for as long as needed to enhance the accommodative effect of its policy rates" and ending just before the ECB begins raising policy rates .
"Today's decision has anchored and anchored the Draghi legacy in future ECB decisions. "Whatever it takes" has just been extended by "as long as it takes," Carsten Brzeski, chief economist at ING Germany, said, referring to Draghi's famous 2012 statement 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, policymakers extended the so-called forward rate of interest rates, saying that they would remain at "current or lower levels" until inflation prospects "robustly" converged with the bank's target inflation level of close to just under 2%. Earlier, the ECB said it intended for interest rates to remain at current or lower levels during the first half of next year.
The ECB also made adjustments to its targeted long-term refinancing operations to further encourage lending and, in an effort to ease the pressure on the bank's profitability from a lower deposit rate, announced that it would introduce a statutory system that would free up a bit of bank overdraft with the ECB from the negative interest rate.
See: ECB's challenge: to drive interest rates into negative territory without destroying euro area banks
The decision drew attention from US President Donald Trump, who has previously accused the ECB of working to subvert the dollar. On Thursday, he used the decision as an excuse to re-base the US Central Bank via Twitter:
To the question of the tweet, Draghi replied that the ECB's decision makers "are not targeting the exchange rate, period."
Read: Trump complains about ECB interest rate cut will hurt US and Mnuchin disagrees
EURUSD, + 0.3270%
fell to a two-year low against the US dollar in the wake of the decision, but later recovered after a round of US economic data and after a news report, Trump said administration officials weighed an interim agreement with China. Pan-Euroepan Stoxx 600 Index
SXXP, + 0.03%
U.S. stocks increased by S&P 500
SPX, + 0.10%
up 0.5%, while Dow Jones industrial average
DJIA, + 0.03%
increased by about 110 points, or 0.4%.
The bond purchase decision sent European bond yields to decline, drawing on US government yields. But the return soon recovered to a positive territory when the negotiating jumpers seemed to take center stage. Interest rates and bond prices are moving in opposite directions.