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The European Central Bank has deepened its tools Thursday by reducing the deposit interest rate in negative territory, launching a new round of monthly bond purchases and taking other measures to stimulate a declining economy in the euro area.
At the penultimate meeting of outgoing ECB President Mario Draghi, the central bank has, as expected, reduced by 10 basis points the deposit rate that banks pay to build up excess reserves. The move pushed the rate to minus 0.5%.
At a press conference following this decision, Mr Draghi said the main factor behind this decision was an obstinately low inflation, which remains well below the target of nearly 2% of the ECB.
Draghi said the risks to the eurozone's outlook have increased as a result of protracted global trade disputes and concerns over the protracted process involving the UK's exit from the European Union. The risk of recession in the euro area remained "low", he said, but it has increased since the last meeting of the ECB.
Economists were less certain that the ECB plans to also revive its quantitative easing program at its September meeting, but policy makers have done so. The ECB has announced that it would start buying 20 billion euros worth of securities per month as of 1 November.
Doubts had emerged in the run-up to the meeting after a handful of ECB officials, in public statements and media interviews, had questioned the need to revive the purchase d & # 39; assets. Draghi, at a press conference after the decision, said the rate cuts and the extension of central bank rate forecasts had enjoyed broad support, while acknowledging that there was more "diversity" of opinions on the revival of bond purchases. Nevertheless, a broad consensus has emerged in favor of the package as a whole.
In addition, economists have described the ECB's asset purchase plan as an "open" EQ, with policymakers committed to continuing purchases "as long as necessary to strengthen the ECB's asset base." The accommodating impact of its key rates "and end shortly before the ECB raise key interest rates.
"Today's decisions have anchored and enshrined Draghi's legacy in future ECB decisions. Carsten Brzeski, chief economist at ING Germany, said: "All that is needed" has just been extended "as long as it is necessary", referring to Draghi's famous statement in 2012 at the height of the debt crisis in the euro area, according to which the ECB would take "to preserve the euro.
Among other measures taken by the ECB on Thursday, policymakers extended the so-called "forward guidance" on rates, saying they would remain at "current or lower levels" until the prospects of "Inflation converge" with robustness "with the target inflation rate of the bank, close to just below 2%. Earlier, the ECB announced its intention to keep rates at current or lower levels throughout the first half of next year.
The ECB also adjusted its targeted long-term refinancing operations to further encourage lending and, with the aim of reducing the pressure on banks' profitability by lowering the deposit rate, announced the introduction of 39, a multilevel system to exempt some of the excess reserves by the banks to the ECB from the negative rate.
See: The challenge of the ECB: push rates further into negative territory without destroying banks in the euro area
The decision drew the attention of US President Donald Trump, who previously accused the ECB of trying to undermine the dollar. On Thursday, he used this decision as an excuse to criticize the US Federal Reserve again via Twitter:
Asked about the tweet, Mr Draghi replied that the decision makers of the ECB "do not target the exchange rate, period".
Lily: Trump complains that lowering the ECB rate will hurt the United States and Mnuchin does not disagree
L & # 39; euro
EURUSD + 0.4905%
This decision dropped the two-year low against the US dollar, but rebounded after a string of US economic data and after a media article that officials in the Trump administration were considering a deal interim trade with China. The pan-European index Stoxx 600
SXXP, + 0.23%
was up 0.2%.
US stocks pushed higher, with the S & P 500
SPX, + 0.46%
up 0.5%, while the Dow Jones Industrial Average
DJIA, + 0.40%
increased by about 110 points, or 0.4%.
The decision to buy bonds caused a drop in European bond yields, resulting in a decline in US Treasury yields. But yields quickly rebounded in positive territory, hopes of trade agreements seem to occupy a central place. Bond yields and prices are moving in opposite directions.
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