ECB cuts rates and restarts bond-buying

ECB cuts rates and restarts bond-buying

Fresh stimulus comes as global slowdown weighs on eurozone growth and inflation

The European Central Bank is to launch a new round 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 interest rate further into negative territory and decided to launch another round of bond-buying.

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.

In new guidance on its future plans, the ECB signalled that interest rates would stay lower for longer than it previously expected.

In a statement, the ECB 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. Even after the ECB’s unprecedented package of monetary easing in recent years, inflation remains just shy of 1 per cent across the eurozone — well below its target of close to 2 per cent. Market participants’ price expectations, as measured by the five-year, five-year inflation swap rate, are languishing at 1.2 per cent.

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.

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.

Bank stocks rose, with UniCredit and Deutsche Bank both up more than 1 per cent

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.

Mario Draghi, who will finish his eight-year term as ECB president and hand over to Christine Lagarde at the end of October, will meet the press at 1.30pm UK time to explain why the central bank took its decision.

New economic forecasts to be released by the ECB on Thursday are expected to underline its rationale for taking action. The central bank is expected to cut its forecast for growth in the 19-member single currency zone and to lower its forecast for inflation.

Ahead of what is one of the most highly anticipated ECB meetings for several years, Mr Draghi had faced some opposition to the idea of more monetary easing from other members of the governing council.