Tuesday, 17 September, 2019

European Central Bank lowers deposit rate to minus 0.5 percent

REUTERS  Ralph Orlowski Outgoing ECB President Mario Draghi REUTERS Ralph Orlowski Outgoing ECB President Mario Draghi
Russell Knight | 12 September, 2019, 22:22

That is a penalty rate that pushes banks to lend excess cash, but was a smaller cut than the market was hoping for.

The eurozone's main interest rate has remained unchanged at zero.

The central bank revealed plans to cut the rate on deposits it takes from banks to minus 0.5% from minus 0.4%.

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.

Gold added 0.4 per cent to US$1,502.70 an ounce.

Unveiling the stimulus package to avert a deeper slowdown, Draghi said: "The package is quite powerful, both in the short term but also in the long run". The QE program was paused in December after buying €2.6 trillion of bonds.

The ECB's support for the eurozone economy comes at a tense political moment as Donald Trump attempts to apply pressure on the US Federal Reserve to cut interest rates as the American economy falters.

The ECB also eased the terms of its long term loans to banks and introduced a tiered deposit rate to help banks.

"There was unanimity that fiscal policy should be main tool".

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ECB President Mario Draghi made the announcement Thursday to address the growing instability in the European economy.

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

The bloc's biggest economy, Germany, is widely thought to be on the brink of recession.

Altium Wealth Portfolio Manager Michael Lee on the implications of an European Central Bank rate cut.

The governing council of the bank said that it had tasked committees with examining policy options, including the re-starting of the asset-purchasing programme.

ECB policymakers met at the bank's headquarters in Frankfurt on Thursday.

"In the world of ECB-watching, such a sequence of signals is as close as it gets to a pre-commitment to action", said Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics, in a note.

Mario Draghi, the head of the European Central Bank will be stepping down from the role this fall and is to be replaced by Christine Lagarde, the current head of the International Monetary Fund.

'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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