ECB Launches Major Stimulus Package, Cuts Key Rate

Central bank’s rate cut triggered an immediate response from President Trump

By Tom Fairless

FRANKFURT—The European Central Bank cut its key interest rate and launched a sweeping package of bond purchases Thursday that lays the ground work for what is likely to be a long period of ultraloose monetary policy, jolting European financial markets and triggering an immediate response from President Trump.

The ECB’s pre-emptive move was aimed at insulating the eurozone’s wobbling economy from a global slowdown and trade tensions.

It is the ECB’s largest dose of monetary stimulus in 3½ years and a bold finale for departing PresidentMario Draghi,who looks to be committing his successor to negative interest rates and an open-ended bond-buying program, possibly for years.

The move triggered immediate criticism from German banks, while leaving key practical questions unanswered. Primarily: How long can the ECB keep buying bonds without enlarging the pool of assets it can buy? Some analysts estimated it might be less than a year.

The euro fell against the dollar after the decision was announced, down 0.4% at $1.10, before recovering. Eurozone government bonds rallied as investors anticipated a longer period of low interest rates and the return to bond markets of a giant buyer.

In a tweet, Mr. Trump said the ECB was “trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.” 

The ECB joins central banks around the world, including the Federal Reserve, that have been cutting interest rates in recent weeks amid a bitter trade dispute between the U.S. and China, a fall in trade volumes and a slowdown in global growth. Second-quarter figures released Thursday by the Organization for Economic Cooperation and Development showed year-to-year economic growth in the Group of 20 leading economies was at its weakest since the start of 2013.

The Fed is expected to cut its key interest rate by a quarter percentage point next week, following a similar cut in July, its first since 2008.

In a statement, the ECB said it would cut its key interest rate by 0.1 percentage point, to minus 0.5%, and start buying €20 billion ($22 billion) a month of eurozone debt, restarting a so-called quantitative easing program that it only phased out last December.

The new QE program is expected to “run for as long as necessary,” and only to end shortly before the bank starts raising interest rates, the ECB said.

The ECB also promised not to raise interest rates “until it has seen the inflation outlook robustly converge” with its target of just below 2%. Thursday’s cut was the ECB’s first since March 2016.

“The final showdown has started with a big bang,” saidCarsten Brzeski,an economist with ING in Frankfurt.

Government bond yields fell across Europe as investors welcomed the package. Benchmark German 10-year bund yields traded at minus 0.66%, down from minus 0.56% earlier in the day. Italian 10-year bond yields dropped sharply, to 0.80% from above 1% earlier in the day. Yields on U.S. Treasurys also fell across the maturity spectrum.

Mr. Draghi said at a news conference that the ECB had acted in response to persistently weak inflation, and a drop in investors’ expectations for future inflation. Recent economic data have shown “a more protracted weakness of the euro area economy, the persistence of prominent downside risks and muted inflationary pressures,” he said.

The ECB’s policies are politically sensitive on both sides of the Atlantic. Mr. Trump criticized Mr. Draghi on Twitter in June for signaling that fresh ECB stimulus was coming. The president has repeatedly criticized the Fed for being less aggressive.

“The Fed sits, and sits, and sits,” Mr. Trump tweeted on Thursday, responding to the ECB’s move. “They get paid to borrow money, while we are paying interest!”

Asked about Mr. Trump’s tweet, Mr. Draghi said the ECB doesn’t target the euro exchange rate. “We have a mandate, we pursue price stability and we don’t target exchange rates. Period,” he said.

Some have questioned whether the fresh shot of stimulus will succeed in protecting the eurozone economy from an international trade war that shows little sign of abating. With borrowing rates in the eurozone already exceedingly low, the economy won’t benefit much from the stimulus, say Mr. Draghi’s critics.

By launching such a bold stimulus package, Mr. Draghi has left the central bank with very little ammunition to fight any new downturn. Unlike the Fed, the ECB never raised interest rates or trimmed its bondholdings during the economic recovery.

Crucially, ECB officials didn’t decide to enlarge the pool of assets the bank can buy, probably reflecting divisions within the committee over how to expand the program further. ECB officials from northern Europe are wary about dipping further into government debt markets or buying new types of assets such as equities, as the Bank of Japanhas done.

Frederik Ducrozet,an economist with Pictet Wealth Management in Geneva, estimated that the ECB can only continue its bond purchases for 9-12 months under the current rules of its QE program. Those rules prohibit the bank from buying more than a third of any government’s debt.

Mario Draghi, President of the European Central Bank at his penultimate meeting, Sept. 12. Photo: ronald wittek/Shutterstock

Mr. Draghi said, “There was no appetite to discuss limits, because we have the headroom to go on for quite some time without raising the discussion about limits.”

“Despite all the market excitement now, the question remains whether this will be enough to get growth and inflation back on track as the real elephant in the room is fiscal policy,” said Mr. Brzeski.

The eurozone economy’s growth has slowed to less than 1%, half the pace of the U.S. Europe has been hit hard by international tensions around trade because of its reliance on exports, with Germany—the region’s economic powerhouse—particularly vulnerable. The bloc also faces the possibility of a disorderly exit from the European Union by the U.K., a prospect that could seriously disrupt business and finance.

The package also binds the hands of Mr. Draghi’s successor, former International Monetary Fund Managing DirectorChristine Lagarde,who will take office on Nov. 1.

Eurozone inflation has been running far beneath the ECB’s target rate of just below 2%, and it isn’t expected to return to target for years.

With interest rates falling further below zero, the ECB also moved Thursday to provide relief for the region’s embattled banks, whose profits have been hurt by negative interest rates. The ECB will create a mechanism to shield banks from the full force of negative rates, and sweeten the terms of a fresh batch of long-term loans.

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