ECB Cuts Rates, Announces New QE Program, EURUSD Slumps Below 1.10

Modesto Morganelli
Settembre 13, 2019

The ECB cut its deposit rate by 10 basis points to a record low of -0.5 per cent, promised that rates would stay low for longer and said it would restart bond purchases at a rate of €20-billion a month from November 1.

Interest rates were cut by 0.1% to their lowest ever level of -0.5%, and the bank will start purchasing €20 billion worth of bonds each month from November. The market had been expecting an end date on the QE program so today's open-ended announcement helped push the single currency sharply lower.

But in a new carrot-and-stick approach, for banks who are lending more - "the part of banks' holdings of excess liquidity will be exempt from the negative deposit facility rate".

Sources told Reuters the BOJ is leaning towards standing pat next week if markets are calm, but is brainstorming ways to deepen negative interest rates at minimal cost.

The ECB will also cut its deposit rate - the interest paid to commercial banks when they place funds with the central bank - by 0.1 percentage points to a new all-time low of -0.5%, meaning banks incur charges on any balances they keep there.

"The Governing Council now expects the key European Central Bank interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2 per cent", the European Central Bank added. But the euro later swapped the slump for a 0.4 per cent gain.

The single currency, which had fallen 3.5 per cent against the dollar since the European Central Bank began signalling an easing of its monetary policy in June, initially surged then quickly reversed course to ease.

But the euro quickly lost steam and European bond yields also rose as profit-taking set in. "It remains doubtful, however, that this will do much to reboot the euro-zone economy let alone achieve the near 2% inflation target", he added. But policy easing by central banks around the globe, including the U.S. Federal Reserve, also put the ECB in a bind. But will it be enough to revive the eurozone's embattled banks and inflation prospects?

The stimulus package comes as the eurozone economy falters alongside a broader global economic slowdown that has been triggered by rising trade protectionism and the US-China trade war. Council members including Jens Weidmann and Klaas Knot, central bank governors for Germany and the Netherlands, respectively, came out against the move.

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