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The President of the European Central Bank, President Mario Draghi, President of the European Central Bank.
The ECB reduced the deposit rate to minus 0.5% from minus 0.4%, and said it will buy debt from November 1 at a pace of 20bn euros ($ 22bn).
"Draghi, whose eight-year term ends next month," said at his press conference in Frankfurt. "We still think the probability of recession for the euro area is small, but it's gone up."
The ECB also cut the cost of its long-term loans to banks, and they will get an exemption from negative rates for some of their deposits after an outcry from the industry on the squeeze on profitability.
After initially rallying on the news, European government bonds' enthusiasm for the measures rapidly faded, with short-term securities in ECB's rate cuts and bond-buying plans. The euro, having weakened on the headlines, losses, while stocks swung between gains and losses.
The ECB is changing its guidance for inflation "robustly" converges to its goal of just below 2%. It has not been possible until mid-2020. It also scrapped a long-term loan program.
The actions prompted US President Donald Trump to tweet that the ECB is "acting quickly" while the Federal Reserve "sits, and sits, and sits." That's in line with his strategy of calling on the Fed to cut rates aggressively. The Fed is likely to lower borrowing costs for this second time this year, as the central banks around the world ease the spreading weakness.
European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the euro against the strong dollar, hurting US exports …. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!
Questioned on that tweet, Draghi said "we do not target exchange rate rates."
The ECB's announcement of a new stimulus package is a remarkable turn of events, just got it done with ever-looser policy. Now inflation is running at barely half the goal, and the manufacturing sector is in contraction that risks spreading to the rest of the economy.
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Hours before the decision, industrial-production figures showed a weak start with euro-zone output dropping 0.4% in July, more than expected. The decline is led by Germany, which is on the verge of a recession as a global slowdown in trade caused by the US-China standoff and the uncertainties surrounding Brexit hurts its exporters.
The approval of such broad measures is a win for Draghi in his penultimate meeting. Governors from Core Economics, Germany, and the Netherlands, backed by the resumption of quantitative easing, saying it should be a last resort in the outlook worsens.
He acknowledged the "diversity of views" on asset purchases but said that "in the end the consensus was not necessary to take a vote." He also said that he was "no appetite" to raise the self-imposed limits on ECB can buy, a key sticking point among others.
What Bloomberg's Economists Say …
"The overall ambition of the package is broadly in line with the Bloomberg Economics forecast." "We are expecting more than $ 45 billion a month we expected, but the open ended nature – rather than the 12 months we expected – and the tie-in to inflation dynamics means it could end up being very substantial. "
Still, there are doubts about ECB's latest measures. Longer-term bond yields have already fallen sharply because of the economic slowdown, and another round of debt.
Academics have questioned the effectiveness of negative rates, with a recent study published by the University of Bath. The fact that the latest rate is covered by exemptions to the impact of these issues. Lenders say they are forced to absorb most of the cost of negative rates, a charge on their deposits, because they can not be passed to ordinary customers.
These doubts over the remaining firepower of central banks have put the spotlight on fiscal stimulus. Draghi and his successor, Christine Lagarde, have suggested that the topic of the economy and the president suggest that the topic was rare point of harmony on Thursday.
"One thing was unanimous," he said. "Namely that fiscal policy should become the main instrument."
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