ECB cuts rates to historic low, restarts quantitative easing

The ECB has cut interest rates to a record low and restarted quantitative easing in an effort to revive the eurozone economy.

ECB president Mario Draghi. Picture: Bloomberg

The European Central Bank has cut interest rates to a record low and restarted quantitative easing in an effort to revive the eurozone economy.

In a widely expected move, Mario Draghi, the bank’s president, announced a significant stimulus program to pump more cheap credit into the economy and encourage lending.

The deposit rate was cut by 0.1 per cent to minus 0.5 per cent and the ECB will begin a €20bn ($32.3bn)-a-month bond-buying program in November.

Mr Draghi, who presided over his penultimate policy meeting before stepping down as president, said that the risks to the outlook “remained tilted to the downside” as he cut the growth forecast for this year from 1.2 per cent to 1.1 per cent.

The forecast for 2020 was lowered from 1.4 per cent to 1.2 per cent.

“These risks mainly pertain to the prolonged presence of uncertainties, related to geopolitical ­factors, the rising threat of protectionism and vulnerabilities in emerging markets,” Mr Draghi said.

Trade wars, political tensions and the prospect of a hard Brexit are all weighing on growth, which slowed to 0.2 per cent between April and the end of June, according to Eurostat, the European Commission’s statistics bureau. This was down from 0.4 per cent in the first quarter of the year.

Mr Draghi has repeatedly told politicians to prepare for more quantitative easing or interest rate cuts as the eurozone economy continues to deteriorate.

Last month he said the growth outlook was “getting worse and worse” and that fiscal measures would be “of the essence” if woes deepened.

The ECB said that interest rates would remain at their present or lower levels until inflation showed signs of picking up. Inflation figures were revised down, with ­prices forecast to rise by 1.2 per cent this year, 1 per cent next year and 1.5 per cent in 2021.

The bloc has been beset by persistently low inflation, which is about half its target rate.

“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,” the bank added.

It also eased the terms of its long-term loans to banks and introduced a two-tiered deposit rate, under which some banks’ holdings are exempt from the negative deposit facility rate. There is growing concern that negative rates are risking banks’ profitability.

In response to criticism of further monetary easing, Mr Draghi said: “I think this concern is very well placed.”

He added: “We should be aware of the side-effects of our policies, be they interest rates or asset purchase. We are closely monitoring the side-effects.”

He also renewed calls for governments to raise spending, saying: “Now is the time for fiscal policy to take charge.”

His pronouncement, which was more forceful than usual, comes during a debate about the effectiveness of ultra-loose monetary policy as interest rates are already at record lows.

Donald Trump responded by putting fresh pressure on the US Federal Reserve to follow suit. “European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting US exports,” the US President tweeted after the announcement. “And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”

The US Federal Reserve is expected to cut rates for the second time in two months next week as central banks of the big economies around the world continue to loosen monetary policy in response to fears of a global economic slowdown.

Mr Trump had previously attacked the ECB over the “grossly undervalued” euro, which he said gave Germany an unfair trade advantage.

In a press conference after the announcement, Mr Draghi said G20 countries were expected not to engage in competitive devaluations: “We have a mandate. We pursue price stability. We don’t target exchange rates, period.”

The Times