Mario Draghi unleashed his most audacious stimulus package yet, unexpectedly testing the lower bounds of all the European Central Bank's interest rates and expanding its monthly bond purchases by a third. The euro sank and stocks rose.
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 80 billion euros ($87 billion) a month from 60 billion euros, and corporate bonds will now be eligible. A new series of long-term loans to banks will begin in June.
The ECB president will hold a press conference at 2:30 p.m. local time to explain the measures.
The package exceeded market expectations for more stimulus and may signal increasing concern about persistent weakness in consumer prices and a Chinese slowdown. Draghi — who will present new economic forecasts — has repeatedly said policy makers are willing to do what's necessary to revive inflation and underpin the region's upturn.
“This is presumably an example of whatever it takes,” said Stewart Robertson, an economist at Aviva Investors in London, which manages about $378 billion in assets. “So far so good. Now let's see if it feeds into the real economy.”
Euro Sinks
The euro sank 1.3 percent to $1.0856 at 2:13 p.m. Frankfurt time. The Stoxx Europe 600 Index jumped more than 2 percent.
The focus now shifts to Draghi's explanation of the package and its potential impact on banks. Negative rates have been criticized for squeezing bank profitability to the point they curb lending.
Investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases under QE.
The ECB said its new round of targeted refinancing operations will start in June. The central bank said the interest rate “can be as low as the interest rate on the deposit facility.”
“The word bazooka comes to mind,” said Chris Hare, an economist at Investec Plc in London. “We're looking for more details now on the TLTRO – exactly how that would work – and also measures that would mitigate the impact of negative rates on banks.”
Bloomberg News
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