European Central Bank (ECB) President Mario Draghi attends a news conference on the outcome of the meeting of the Governing Council, in Frankfurt, Germany, September 12, 2019. REUTERS/Ralph Orlowski
September 12, 2019
By Balazs Koranyi and Francesco Canepa
FRANKFURT (Reuters) – The European Central Bank promised an indefinite supply of fresh asset purchases and cut interest rates deeper into negative territory on Thursday in an effort to prop up the ailing euro zone economy that was cheered by financial markets.
Coming in the final weeks of ECB President Mario Draghi’s mandate, the moves set the stage for likely easing next week by the U.S. Federal Reserve and Bank of Japan aimed at supporting a world economy increasingly characterized by low growth.
Yet there were immediate doubts as to whether the ECB measures — the few remaining in its monetary policy arsenal — would be enough to boost a euro zone recovery in the face of global trade tensions and possible disruption from Brexit.
The ECB cut its deposit rate by 10 basis points to a record low of -0.5%, promised that rates would stay low for longer and said it would restart bond purchases at a rate of 20 billion euros a month from Nov. 1.
“The Governing Council expects (bond purchases) to run for as long as necessary to reinforce the accommodative impact of its policy rates, and to end shortly before it starts raising the key ECB interest rates,” it said.
Such a formulation suggests that purchases could go on for years. Markets do not expect rates to rise for nearly a decade.
The news triggered a rally in euro zone bonds that would cut the cost of borrowing in the 19-country currency bloc, and pushed the euro below $1.10, prompting expectations that inflation could rise.
The rate cut will however increase the cost to commercial banks of parking their more than 1 trillion euros worth of excess reserves at the central bank. The ECB said it would compensate lenders for part of this charge to ensure they continued to lend to the real economy.
The ECB also eased the terms of its long-term loan facility to banks and said it would introduce a multi-tier deposit rate facility to help them.
Draghi, whose pledge in 2012 that the ECB would do “whatever it takes” to save the euro is credited with helping restore stability at the peak of the bloc’s debt crisis, stressed the currency zone needed more support.
“Incoming information since the last Governing Council meeting indicates a more protracted weakness of the euro area economy, the persistence of prominent downside risks, and muted inflationary pressures,” he told a news conference.
RECESSION BECKONS?
Indeed the ECB’s initial, unprecedented 2.6-trillion-euro bond purchase scheme since the financial crisis has had only limited success in stimulating activity.
Data earlier on Thursday showed euro zone industrial production fell for a second month in July, while Germany’s Ifo institute predicted a recession in Europe’s economic powerhouse in the third quarter.
“Will the more aggressive ECB stance make a difference? Not much,” concluded analyst Holger Schmieding at Berenberg.
“A series of external shocks, notably the U.S.-Chinese trade war and the Brexit mess, have derailed the euro zone recovery. Amid such pervasive uncertainty, even lower financing costs for households and companies will not raise consumption and/or business investment significantly.”
Although markets had priced in a revival of asset purchases, over half a dozen conservative policymakers spoke out in public against such a scheme, leaving markets in doubt about how bold the ECB’s measures would be.
The decision suggests that many of these skeptics eventually agreed, giving Draghi a comfortable enough majority in what is likely to be his last major policy move before handing over to Christine Lagarde later this year.
The ECB has undershot its inflation target of almost 2% since 2013 so stimulus was essential to maintain credibility. But policy easing by central banks around the globe, including the U.S. Federal Reserve, also put the ECB in a bind.
Not easing in sync with the Fed also risked pushing the euro higher, which would then dampen inflation and put the bank even further away from its targets.
But Draghi’s critics argue that the euro zone’s biggest troubles — a global trade war, Brexit and China’s slowdown — are outside the ECB’s control, so any stimulus would have a limited impact.
They also say the bloc is experiencing a slowdown, not a recession, and that bond purchases, the ECB’s most powerful tool, should be reserved for real crises, especially since the bank has used up much of its firepower in past stimulus rounds.
With Lagarde taking over on Nov. 1, some also argued that the ECB should refrain from making long-term commitments that would tie the hands of the bank’s next president.
(Additional reporting by Michelle Martin and Tom Sims; Writing by Mark John; Editing by Catherine Evans)
