Mario Draghi unleashed his most audacious stimulus package yet, unexpectedly testing the lower bounds of all the European Central Bankâ€™s interest rates, expanding its monthly bond purchases by a third and signaling it may pay lenders to borrow its cash.
The 25-member Governing Council, meeting in Frankfurt on Thursday, cut 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 â‚¬80 billion a month from â‚¬60 billion, and corporate bonds will now be eligible. A new series of long-term loans to banks will begin in June.
â€œThe 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,â€ Draghi said. The steps are calibrated to â€œreinforce the momentum of the euro area economy,â€ he said.
The package exceeded market expectations for more stimulus and may signal increasing concern about persistent weakness in consumer prices and a Chinese slowdown. Draghi has repeatedly said policy makers are willing to do whatâ€™s necessary to revive inflation and underpin the regionâ€™s upturn.
â€œThis is presumably an example of whatever it takes,â€ said Stewart Robertson, an economist at Aviva Investors in London, which manages about $378 bn in assets. â€œSo far so good. Now letâ€™s see if it feeds into the real economy.â€
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.
â€œWeâ€™ve discussed for some time a tiering system, an exemption system,â€ Draghi said. â€œIn 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.â€