The European Central Bank is to launch a new package of stimulus for the eurozone economy in a bid to tackle sluggish growth and persistently low inflation.
At a meeting of its governing council in Frankfurt on Thursday, the ECB lowered its deposit rate further into negative territory and decided to launch another round of bond-buying.
The announcement provoked a furious response from US president Donald Trump, who reiterated his complaint that the ECB was attempting to devalue the euro.
The ECB said that it will cut its deposit rate from minus 0.4 per cent to a new record low of minus 0.5 per cent. The bank will also restart its quantitative easing (QE) programme, buying €20bn of bonds every month from November.
It is the first time the ECB has cut rates since March 2016; the resumption of QE revives a bond-buying programme that the ECB paused last December after buying €2.6tn of bonds.
ECB president Mario Draghi, who will finish his eight-year term as ECB president and hand over to Christine Lagarde at the end of October, said in a press conference after the decision that the eurozone faced “more protracted weakness” than previously thought, resulting mainly from the global trade slowdown.
The ECB released new economic forecasts which underlined its rationale for taking action. The central bank cut its forecast for growth in the 19-member single currency zone this year by 10 basis points to 1.1 per cent, and by 20 bps to 1.2 per cent for 2020.
It also lowered its forecast for inflation by 10 bps to 1.2 per cent this year, and by 40 bps 1.0 per cent next year.
In new guidance on its future plans, the ECB signalled that interest rates would stay lower for longer than it previously expected.
The statement said: “The governing council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
Its earlier guidance was that interest rates would not rise before mid-2020.
“European Central Bank acting quickly,” Mr Trump tweeted. “They are trying, and succeeding, in depreciating the euro against the VERY strong dollar, hurting US exports . . . And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”.
Mr Draghi responded by saying: “We have a mandate. We pursue price stability. And we don’t target exchange rates. Period.”
Eurozone sovereign bond yields fell after the announcement, as investors anticipated the effect of fresh ECB bond-buying. The German 10-year yield dropped 7 basis points to minus 0.638 per cent, while the equivalent Italian bond yield fell 16bp to 0.819 per cent.
The euro gave up earlier gains to trade down 0.3 per cent against the dollar at $1.0978.
“At the margin, the ECB is making it easier for governments to finance the modest fiscal expansion which they are planning anyway,” said Holger Schmieding, chief economist at Berenberg. “More importantly, the ECB is containing the downside risks.”
To counter fears that negative rates will hurt the eurozone’s fragile banking system, the ECB announced that it would introduce a tiering system to exclude some of the banks’ excess deposits from negative rates. Other countries with negative rates, including Japan, Denmark and Switzerland, have similar rules.
The ECB will also offer cheap loans for banks under its third targeted longer-term refinancing operation (TLTRO). While tiering will help northern European banks that have large excess deposits, the cheap TLTRO loans will help southern European lenders with higher funding costs.
Bank stocks rose, with UniCredit and Deutsche Bank both up more than 1 per cent.
“On first glance this looks like a pretty dovish package,” said Andrew Kenningham, chief Europe economist at Capital Economics. “It remains doubtful, however, that this will do much to reboot the eurozone economy let alone achieve the near-2 per cent inflation target.”
The ECB is the latest in a series of major central banks to switch from tightening monetary policy to loosening again in response to growing fears of a global economic slowdown. Next week the US Federal Reserve is expected to cut rates for the second time in two months.
But Mr Draghi warned that further action was needed by the eurozone’s member states. “Governments with fiscal space should act in a timely manner,” he said. “Now it’s time for fiscal policy to take charge.”
Carsten Brzeski, chief economist for Germany at ING, said: “This is Mario Draghi’s final ‘whatever it takes’. Despite all market excitement now, the question remains whether this will be enough to get growth and inflation back on track as the real elephant in the room is fiscal policy.”