ECB announces rate cuts and further monetary easing

The European Central Bank (ECB) on Thursday prepared markets for further easing, dropping the euro to its two-year low against the dollar.

The central bank said it expects its key rates to remain "at their current or lower levels" at least until the first half of 2020, updating the wording of previous statements and suggesting a reduction. rates on the horizon.

The bank also reported that additional measures could be taken to stimulate the euro zone economy. She indicated that she was considering options, "such as designing a tiered system for the compensation of the reserve, and options for the size and composition of new badet purchases. potential net ".

This means that the ECB can reduce the fees that banks have to pay to park their excess cash in the bank. He also indicated that he was considering reintroducing a quantitative easing program in the coming months. Quantitative easing, or large-scale badet purchase, involves buying government bonds from euro zone countries to further stimulate lending and fueling the economy. inflation.

On Thursday, the central bank of the euro area maintained the rates of its main refinancing operations, its marginal lending facility and its deposit facility at 0%, 0.25% and -0.40% respectively. These reached record levels following the sovereign debt crisis in euros in 2011.

The euro reached its lowest level in two years at $ 1,1103 after the change in direction of the ECB, while the yield on German 30-year bonds hit a record low of 0.167%, according to the data. of the Refinitiv research company.

Traders are now waiting to hear from ECB President Mario Draghi, who is scheduled to speak at 1.30pm. London time.

Carsten Brzeski, chief economist at ING Germany, said in a note: "The last interview with the ECB will have to make its way, and it seems more and more that the September meeting will bring not only a single measure, but also a whole several measures, the measures. "

Draghi warned last month that without a clear improvement in the eurozone economy, the central bank would announce new stimulus measures. This has led market participants to raise their expectations for further interest rate cuts or even a bond purchase program. Draghi, speaking in June in Sintra, Portugal, said his institution was ready to use whatever measures were needed to revive the struggling economy.

Data released Wednesday also highlighted recent weakness, showing that German manufacturing PMIs (Purchasing Managers Index) dropped to 43.1 in July, from 45.0 in June. At the same time, new orders in the country fell at their fastest pace since July 2012, due to weak Chinese demand and the auto sector.

The ECB launched a major stimulus package following the 2011 sovereign debt crisis. These included lowering interest rates to record levels, buying government bonds and to further facilitate lending to euro area banks. The bank tried to normalize its policy last year – and catch up with other central banks such as the US Federal Reserve – but with the world trade wars and the slowing of the situation in China, most of these banks have now announced a turnaround. In the United States, investors believe that there is currently an 80% probability that the Fed will announce a 25 basis point cut when it meets next week.