European Central Bank cuts key rate, approves new round of bond purchases

Andrew Cummings
September 12, 2019

On Thursday a measure of underlying US inflation accelerating by more than forecast in August, complicating the central bank's decision on whether to ease policy further.

That is a penalty rate that pushes banks to lend excess cash, but was a smaller cut than the market was hoping for. "Admittedly, the 10 basis point cut to the deposit rate was the least that it could have done and the monthly pace of asset purchases, at €20 billion beginning on 1st November, was a bit smaller than expected", said Andrew Kenningham, chief Europe economist at Capital Economics in an email to Markets Insider.

On top of the rates and bond-buying moves, policymakers also agreed a "tiering" system to spare some of banks' deposits the harshest negative rates, after years of complaining from financial firms. The ECB said it would compensate lenders for part of this charge to ensure they continued to lend to the real economy.

European Central Bank cuts rates by 10bps, in-line with market expectations, announces new QE program.

Known as quantitative easing, the previous €2.6 trillion ($2.87tn) programme had only been phased out in December 2018, when it looked like the eurozone's economy was picking up.

Data earlier on Thursday showed euro zone industrial production fell for a second month in July, while Germany's Ifo institute predicted a recession in Europe's economic powerhouse in the third quarter. The euro gained and bonds were mixed. The ECB stimulus will run until shortly before the next rate increase, and President Mario Draghi painted a gloomy picture of the region's economy at a press conference after the decision.

Draghi, who steps down at the end of October, will be succeeded by the former managing director of the International Monetary Fund Christine Lagarde.

In a scathing tweet this afternoon, Mr Trump wrote: "European Central Bank, acting quickly, Cuts Rates 10 Basis Points".

At 1%, inflation within the 19-member currency union remains stubbornly below the bank's "below, but close to, 2%" target.

European Central Bank chief Mario Draghi said in July that uncertainty caused by trade tensions and "the possibility of a hard Brexit" was weighing on the eurozone economy.

With Lagarde taking over on November 1, some also argued that the ECB should refrain from making long-term commitments that would tie the hands of the bank's next president.

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