The European Central Bank has approved a fresh stimulus package today after cutting interest rates and approving a new round of bond purchases to prop up the struggling eurozone, hoping to halt a drop-in inflation.
The ECB on Thursday cut its deposit rate to a record low -0.5% from -0.4% and will restart its bond purchasing of 20 billion euros a month as of November. The Bank has also eased the terms of its long-term loans to banks and introduced a tiered deposit rate to help banks.
Basically, what this all means is that the ECB hoped with negative interest rates it would encourage lending by the banks and spending by the public. Unfortunately, this hasn’t happened and has kept inflation low. The ECB targets inflation at 2%, currently inflation is nowhere near this in the Eurozone, so to try and combat this they have cut rates further, making it more attractive to borrow money and will pump billions of euros into EU to encourage growth.
With Germany skating very close to a recession and a global trade war depleting domestic confidence, the ECB has promised more support to the EU’s economy. One question that investors will be asking is how extensive this stimulus would be?
In the ECB’s policy statement, the European central bank said, “The Governing Council expects (bond purchases) to run 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,”
In classic Trump fashion the U.S. President Tweeted shortly after that the ECB is “acting quickly” whilst the FED “sits, and sits, and sits.” He has previously cited loose ECB policy in his calls for the Fed to cut rates aggressively.
The Federal reserve is likely to cut interest rates next week for the second time this year, as central banks around the world ease to combat the spreading weakness.
The ECB’s announcement of a new stimulus package is a remarkable turn of events, just nine months after it signalled it was no longer looking to loosen Monetary policy. Now, with inflation running at barely half the target rate and the manufacturing sector in a contraction, there is a heightened risk of weakness spreading to the rest of the economy.
As a result of the news we have seen the Euros weaken across a basket of currencies, pushing GBP/EUR into the mid to high 1.12’s, a 3-month high.