European Central Bank paves way for fresh stimulus package

Mario Draghi has paved the way for a fresh package of monetary stimulus to boost the ailing euro zone economy before he departs in October, signalling the European Central Bank will cut rates and embark on a fresh round of asset purchases.

The ECB president said on Thursday that officials at the euro zone’s central bank would look into a range of stimulus options – including rate cuts, a commitment to keep policy exceptionally loose for years to come and another quantitative easing package – to counter fears that the bank would persistently undershoot its inflation target of just under 2 per cent.

“A considerable mass of inflation expectations are moving towards [a belief that there will be] lower inflation,” said Mr Draghi. “We don’t like it and therefore we are determined to act.”

ECB watchers viewed his ratcheting up of the rhetoric on inflation as a clear sign that the governing council would, at its next meeting in September, join a growing chorus of central bankers loosening policy to counter fears of a global slowdown.

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Mr Draghi is due to step down after the ECB’s October meeting, to be replaced by Christine Lagarde, currently head of the IMF.

Monetary policy

"It now increasingly looks as if the September meeting will not only bring a single measure but rather a package of several measures," said Carsten Brzeski, chief economist at ING Germany, a bank.

The US Federal Reserve is expected to cut interest rates by a quarter point at its monetary policy vote next week.

Mr Draghi said “most people” on the governing council “converged on this” response to the economic slowdown, but admitted the statement did not have unanimous support. In recent weeks some hawks on the council have sounded lukewarm about the prospect of fresh stimulus.

Despite the clear sign of fresh easing, markets’ reaction to the decision was muted.

The euro went on a volatile run, bouncing up off two-year lows to rise 0.2 per cent overall, at $1.1169, as Mr Draghi spoke to reporters.

A rally for the region’s government bonds also faded, drawing yields higher as the trading day developed. European stocks were unsettled.

Some investors had expected the bank to cut rates as soon as Thursday, citing a raft of bad data on the Germany economy, the euro zone’s largest and until recently its economic powerhouse.

Instead, the ECB opted to keep rates on hold, with the main refinancing rate remaining at zero and the deposit rate at minus 0.4 per cent.

Expectations

In a move that paved the way for rate cuts in the coming months, the governing council changed its forward guidance to say that it expects rates to remain “at their present or lower levels” at least through the first half of 2020.

The mention of lower rates raised markets’ expectations that the ECB will cut the deposit rate in September.

“The ECB might have disappointed those looking for an immediate rate cut after the spate of weak sentiment data, but their statement of intent is clear: easing is coming, and soon,” said Hetal Mehta, senior European economist at Legal & General Investment Management.

The bank has not expanded its €2.6 trillion quantitative easing programme since December, but Mr Draghi has indicated in recent weeks that it could do so, should the economic data continue to suggest growth will remain sluggish.

– Copyright The Financial Times Limited 2019