ECB unexpectedly cuts all interest rates to record lows, signals ABS purchases
Mario Draghi Says New Programs Will Be Launched Next Month
FRANKFURT—The European Central Bank unexpectedly lowered all its interest rates Thursday and announced two new programs under which it will buy asset-backed securities and covered bonds issued by eurozone banks.
Speaking in a news conference, ECB President Mario Draghi said the new programs will be launched next month, and operational details will be provided after the governing council’s Oct. 2 meeting.
While the ECB had in recent months indicated it was considering an ABS purchase program, the addition of a covered bond program and rate cuts was a surprise, and an indication that officials have grown increasingly concerned that the recent period of very low inflation could persist longer than first thought and may threaten the currency area’s economic recovery.
“In August, we see a worsening of the medium-term inflation outlook, a downward movement in all indicators of inflation expectations,” Mr. Draghi said. “Most, if not all, the data we got in August on GDP (gross domestic product) and inflation showed that the recovery was losing momentum.”
Mr. Draghi said the measures announced Thursday were intended to “strengthen” the package agreed in June, which also included rate cuts and new, cheap medium-term loans for banks intended to boost their lending to eurozone businesses.
He stressed that the central bank won’t be able to cut its interest rates any further.
“Now we are at the lower bound,” he said.
However, Mr. Draghi said that the central bank is ready to provide more stimulus if needed through “unconventional instruments within its mandate,” including large-scale purchases of bonds known as quantitative easing.
Responding to questions from reporters, Mr. Draghi said that launch of such a program had been discussed by the governing council, and some members had wanted to proceed immediately with QE.
“Some were in favor of doing more, some were in favor of doing less,” Mr. Draghi said, confirming that some members of the governing council opposed the rate cuts.
The euro fell more than 1% against the dollar to a 14-month low after the ECB announced the rate cut. Equity markets rose, with the Stoxx Europe 600 gaining 0.87% and the U.K.’s FTSE up 0.2%, closing in on its highest level in its 30-year history.
The ECB’s main lending rate was lowered to 0.05% from 0.15%. The ECB also lowered the rate on overnight bank funds parked at the central bank to -0.2% from -0.1%. The ECB in June became the largest central bank to experiment with a negative rate on bank deposits, a measure aimed at encouraging banks to lend surplus funds to other financial institutions rather than parking them at the ECB. It also cut the rate it charges on overnight loans to 0.30% from 0.40%.
The vast majority of economists—43 out of 47 in a Wall Street Journal survey—had expected no change in light of ECB President Mario Draghi’s comments after the June rate cuts that the ECB had “from all practical purposes…reached the lower bound” on rates.
Mr. Draghi fanned hopes for additional easing last month when he warned that market-based measures of inflation expectations had weakened, an indication that officials have grown increasingly concerned that the recent period of very low inflation could persist longer than first thought.
Recent economic data highlight that risk. Gross domestic product in the eurozone stalled in the second quarter, with Germany and Italy posting contractions and France failing to expand. Business surveys for July and August point to a meager start to the third quarter, too.
A separate report showed inflation weakening to a five-year low in August, just 0.3% in annual terms.
