European Central Bank to expand QE, cuts interest rates further
Mario Draghi unleashed his most audacious stimulus package yet, unexpectedly testing the lower bounds of all the European Central Bank's interest rates and expanding its monthly bond purchases by a third. The euro sank and stocks rose. The 25-member Governing Council, meeting in Frankfurt on Thursday, cut the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent and lowered its benchmark rate to zero. Bond purchases were increased to 80 billion euros ($87 billion) a month from 60 billion euros, and corporate bonds will now be eligible. A new series of long-term loans to banks will begin in June.
The package exceeded market expectations for more stimulus and may signal increasing concern about persistent weakness in consumer prices and a Chinese slowdown. Draghi -- who will present new economic forecasts -- has repeatedly said policy makers are willing to do what's necessary to revive inflation and underpin the region's upturn.
"This is presumably an example of whatever it takes," said Stewart Robertson, an economist at Aviva Investors in London, which manages about $378 billion in assets. "So far so good. Now let's see if it feeds into the real economy." The euro sank 1.3 percent to $1.0856 at 2:13 p.m. Frankfurt time. The Stoxx Europe 600 Index jumped more than 2 percent.
The focus now shifts to Draghi's explanation of the package and its potential impact on banks. Negative rates have been criticized for squeezing bank profitability to the point they curb lending.
Investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases under QE.
The ECB said its new round of targeted refinancing operations will start in June. The central bank said the interest rate "can be as low as the interest rate on the deposit facility."
"The word bazooka comes to mind," said Chris Hare, an economist at Investec Plc in London. "We're looking for more details now on the TLTRO - exactly how that would work - and also measures that would mitigate the impact of negative rates on banks."
The European Central Bank cut all three of its interest rates and expanded its asset-buying program on Thursday, delivering a bigger-than-expected cocktail of actions to boost the economy and stop ultra low inflation becoming entrenched. Surprising markets, it cut its main refinancing rate to zero from 0.05 percent. The euro fell around 1 percent against the dollar.
Hoping to boost lending, consumption and inflation, the ECB said it would also start buying corporate debt and would also launch four new rounds of cheap loan packages, to be extended by banks to the real economy.
The ECB has little to show for the 700 billion euros it has spent buying government bonds and other assets in the past year, as tumbling raw materials prices blunt the impact of its quantitative easing.
That raises the risk that people will lose faith in the bank's commitment to its mandate. Inflation has been below the ECB's nearly 2 percent target for three years and is likely to remain so for many more. The ECB cuts its deposit rate to -0.4 percent from -0.3 percent, in line with expectations, but it also surprised markets by cutting its other two interest rates. As well as the refinancing rate, which means banks can now borrow at its weekly auctions at no cost, it cut the marginal lending rate, used by banks to borrow from the ECB overnight, to 0.25 percent from 0.3 percent.
Although inflation expectations have fallen sharply in recent months on lower crude oil prices, Europe's growth prospects have held up relatively well as domestic consumption is proving resilient to a slowdown in emerging markets. Weak business and industrial sentiment indicators have however suggested that Europe is facing increasing headwinds, particularly from slowing growth in China.