Friday, 15 November, 2019

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

European CB cuts key rate to resume bond-buying Indian markets to be firm as Asia rises on hopes of US-China trade war ease
Russell Knight | 13 September, 2019, 08:20

The European Central Bank (ECB) on Thursday announced its key policy decisions to cut the deposit rate by 10 basis points to minus 0.50 percent and to restart net purchases under its asset purchase program (APP) at a monthly pace of 20 billion euros (about 21.9 billion US dollars) as from November 1.

That is a penalty rate that pushes banks to lend excess cash. 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. The central bank will buy EUR20 billion of bonds per month "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".

Such a formulation suggests that purchases could go on for years.

The Aussie share market rises for the third straight day. The ECB said it would compensate lenders for part of this charge to ensure they continued to lend to the real economy.

The 25-member governing council voted to cut deposit interest rates by 10 basis points to -0.05%, a record low, according to an European Central Bank statement on Thursday. But will it be enough to revive the eurozone's embattled banks and inflation prospects? The bank ended a previous bond-purchase stimulus only in December after buying 2.6 trillion euros [$2.9 trillion] in financial assets from banks.

Meanwhile, the Eurozone's largest economy is expected to fall into recession in the third quarter.

Although markets had priced in a revival of asset purchases, over half a dozen conservative policy-makers spoke out in public against such a scheme, leaving markets in doubt about how bold the ECB's measures would be.

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One Australian dollar is buying 68.73 U.S. cents.

But the euro quickly lost steam and European bond yields also rose as profit-taking set in.

Neil Wilson from Markets.com said: 'This was a kitchen sink job but the European Central Bank has kept a just a tiny bit back in the tank in reserve.

The ECB has persistently undershot its inflation target of nearly 2 per cent since 2013 so stimulus was essential to maintain credibility.

Over the in US, President Donald Trump also said he would consider an interim trade deal but would prefer a full agreement.

The bigger-than-expected stimulus will increase pressure on the U.S. Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterized by low growth and protectionist threats to free trade. Council members including Jens Weidmann and Klaas Knot, central bank governors for Germany and the Netherlands, respectively, came out against the move.

'Draghi has done pretty much everything he could do with this one and is leaving the door open for Christine Lagarde to cut further'.

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