Draghi Expands ECB Stimulus With More QE and Lower Rates

Is the ECB Done With Lowering Borrowing Costs?
  • ECB expands QE purchases by a third, says more TLTROs to come
  • Policy makers striving to stave off euro-area deflation

Mario Draghi delivered interest-rate cuts, more bond purchases and a potential subsidy to lenders in a renewed attack against the threat of deflation, before whipsawing the euro by saying the European Central Bank is done with lowering borrowing costs for now.

The 25-member Governing Council, which met in Frankfurt on Thursday, reduced 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 Governing Council expects key interest rates to remain at present or lower levels for long period of time and well past the horizon of our net asset purchases,” Draghi said. Based on the current view, “we don’t anticipate it will be necessary to reduce rates further.”

The euro reversed losses as the ECB president signaled a diminished prospect of further cuts. The currency dropped earlier after the initial package exceeded market expectations. Draghi has repeatedly said policy makers are willing to do what’s necessary to revive inflation and underpin the region’s upturn.

The 19-nation shared currency climbed 0.6 percent to $1.1067 as of 3:37 p.m. Frankfurt time, after earlier dropping as much as 1.6 percent.

The ECB president told a press conference in Frankfurt that:

  • Interest rates will remain at present or lower levels for an extended period of time
  • The outlook for growth has been revised down, reflecting weakening global prospects
  • 2016 GDP revised down to 1.4% from 1.7%
  • 2017 GDP revised down to 1.7% from 1.9%, GDP to be 1.8% in 2018
  • Inflation forecast for 2016 slashed to 0.1% from 1%
  • Inflation to be 1.3% in 2017, will average 1.6% in 2018

The central bank stopped short of introducing a tiered deposit rate, which had been the subject of speculation before the meeting.

“We’ve discussed for some time a tiering system, an exemption system,” Draghi said. “In end the Governing Council decided not to, exactly for the purpose of not signaling that we can go as low as we want on this.”

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,” indicating that the central bank may pay lenders to borrow from it.

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