The European Central Bank delved deep into its tool box on Thursday, cutting its deposit interest rate further into negative territory, launching a new round of monthly bond purchases and taking other steps to stimulate a flagging eurozone economy.
In outgoing ECB President Mario Draghi’s next-to-last meeting, the central bank, as expected, delivered a 10 basis point cut to the deposit rate that banks pay to park excess reserves with it. The move pushed the rate to minus 0.5%.
In a news conference following the decision, Draghi said stubbornly low inflation, which remains well below the ECB’s target of near but just below 2%, was the main driver for the decision.
Draghi said risks to the eurozone outlook had increased as a result of prolonged global trade disputes and concerns about the prolonged process involving the U.K. exit from the European Union. Risks of a eurozone recession remained “small,” he said, but had increased since the ECB’s last meeting.
Economists had been less certain whether the ECB would also move to relaunch its quantitative easing program at its September meeting, but policy makers did so. The ECB said it would begin buying 20 billion euros a month worth of securities beginning Nov. 1.
Doubts had emerged in the runup to the meeting after a handful of ECB officials, in public remarks and media interviews, had questioned the need for relaunching asset purchases. Draghi, in a news conference following the decision, said there had been broad support for the rate cut and an extension of the central bank’s forward guidance on rates, but acknowledged more “diversity” of views on relaunching bond purchases. Still, there was a broad consensus in favor of the entire package.
Moreover, economists were describing the ECB’s asset-buying plan as “open-ended” QE, with policy makers pledging to continue purchases “as long as necessary to reinforce the accommodative impact of its policy rates” and to end shortly before the ECB begins to raise key interest rates.
“Today’s decisions have anchored and enshrined 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 Draghi’s famous 2012 pronouncement 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 rates, saying they would remain at “present or lower levels” until the inflation outlook “robustly” converges with the bank’s target inflation rate of near but just below 2%. Previously, the ECB said it intended rates to remain at present or lower levels through the first half of next year.
The ECB also made adjustments to its targeted long-term refinancing operations to further encourage lending and, in a bid to ease pressure on bank profitability from a lower deposit rate, announced it would introduce a tiered system that would exempt a chunk of excess reserves parked by banks with the ECB from the negative rate.
The decision drew the attention of U.S. President Donald Trump, who has previously accused the ECB of working to undercut the dollar. On Thursday, he used the decision as an excuse to again bash the U.S. Federal Reserve via Twitter:
Asked about the tweet, Draghi responded that ECB policy makers “do not target the exchange rate, period.”
The euro EURUSD, +0.3361% fell to a two-year low versus the U.S. dollar in the wake of the decision, but later pared its decline after a round of U.S. economic data and as Draghi spoke. The pan-Euroepan Stoxx 600 index SXXP, -0.14% gave up an early rise to fall around 0.2%.
The bond-buying decision sent European bond yields sinking, dragging on U.S. Treasury yields also.