ECB Cuts Rates and Launches Sweeping Stimulus Package

The European Central Bank cut its key interest rate and launched a sweeping package of bond purchases Thursday that lays the ground work for what is likely to be a long period of ultraloose monetary policy, jolting European financial markets and triggering an immediate response from President Trump.

The ECB’s pre-emptive move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions.

It is the ECB’s largest dose of monetary stimulus in 3 1/2 years and a bold finale for departing President Mario Draghi, who is committing his successor to negative interest rates and an open-ended bond-buying program, possibly for years.

The euro fell sharply against the dollar after the decision was announced, down 0.4% at $1.10, and eurozone government bonds rallied, as investors anticipated a longer period of low interest rates and the return to bond markets of a giant buyer.

In a tweet, Mr. Trump said the ECB was “trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”

“The final showdown has started with a big bang,” said Carsten Brzeski, an economist with ING in Frankfurt.

The ECB joins central banks around the world, including the Federal Reserve, that have been cutting interest rates in recent weeks amid a bitter trade dispute between the U.S. and China, a fall in trade volumes and a slowdown in global growth. Second-quarter figures released Thursday by the Organization for Economic Cooperation and Development showed year-to-year economic growth in the Group of 20 leading economies was at its weakest since the start of 2013.

The Fed is expected to cut its key interest rate by a quarter percentage point next week, following a similar cut in July, its first since 2008.

In a statement, the ECB said it would cut its key interest rate by 0.1 percentage point, to minus 0.5%, and start buying EUR20 billion ($22 billion) a month of eurozone debt, restarting a so-called quantitative easing program that it only phased out last December. The new QE program is expected to “run for as long as necessary,” and only to end shortly before the bank starts raising interest rates, the ECB said.

At a news conference, Mr. Draghi said the ECB had acted in response to persistently weak inflation, and a drop in investors’ expectations for future inflation. Recent economic data have shown “a more protracted weakness of the euro area economy, the persistence of prominent downside risks and muted inflationary pressures,” he said.

Asked about Mr. Trump’s tweet, Mr. Draghi said the ECB doesn’t target the euro exchange rate.

Government bond yields fell across Europe as investors welcomed the package. Benchmark German 10-year bund yields traded at minus 0.66%, down from minus 0.56% earlier in the day. Italian 10-year bond yields dropped sharply, to 0.80% from above 1% earlier in the day. Yields on U.S. Treasurys also fell across the maturity spectrum.

The ECB also promised not to raise interest rates “until it has seen the inflation outlook robustly converge” with its target of just below 2%. Thursday’s cut was the ECB’s first since March 2016.

Some have questioned whether the fresh shot of stimulus will succeed in protecting the eurozone economy from an international trade war that shows little sign of abating. With borrowing rates in the eurozone already exceedingly low, the economy won’t benefit much from the stimulus, say Mr. Draghi’s critics.

“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,” said Mr. Brzeski.

The eurozone economy’s growth has slowed to less than 1%, half the pace of the U.S. Europe has been hit hard by international tensions around trade because of its reliance on exports, with Germany — the region’s economic powerhouse — particularly vulnerable. The bloc also faces the possibility of a disorderly exit from the European Union by the U.K., a prospect that could seriously disrupt business and finance.

By launching such a bold stimulus package, Mr. Draghi has left the central bank with very little ammunition to fight any new downturn.

Crucially, Mr. Draghi said Thursday that ECB officials hadn’t agreed to alter the rules of its bond-buying program, increasing limits that would allow it to buy more government debt. That will raise concerns among investors about how long the program can continue.

“We have relevant headroom to go on for quite a long time at this rhythm without the need to raise the discussion about limits,” Mr. Draghi said.

Unlike the Fed, the ECB never raised interest rates or trimmed its bondholdings during the economic recovery.

The package also binds the hands of Mr. Draghi’s successor, former International Monetary Fund Managing Director Christine Lagarde, who will take office on Nov. 1.

Eurozone inflation has been running far beneath the ECB’s target rate of just below 2%, and it isn’t expected to return to target for years.

With interest rates falling further below zero, the ECB also moved Thursday to provide relief for the region’s embattled banks, whose profits have been hurt by negative interest rates. The ECB will create a mechanism to shield banks from the full force of negative rates, and sweeten the terms of a fresh batch of long-term loans.

The ECB’s policies are politically sensitive on both sides of the Atlantic. Mr. Trump criticized Mr. Draghi on Twitter in June for signaling that fresh ECB stimulus was coming. The president argued that the move unfairly supported European companies at the expense of U.S. firms by weakening the euro currency.

Mr. Trump has repeatedly criticized the Fed for being less aggressive, tweeting on Wednesday that it should cut interest rates “to ZERO, or less.”
Source: Dow Jones