ECB cuts key rate, to restart bond buying

Fresh round of stimulus to help euro zone's economy shaken by US-China trade tensions, Brexit

FRANKFURT • The European Central Bank (ECB) yesterday delivered a new blast of monetary stimulus to help the shaky economy in the face of uncertainties such as the United States-China trade conflict and Brexit.

In a wide-ranging package of measures that will ensure outgoing President Mario Draghi leaves a mark on the ECB's policies long after he leaves next month, the bank cut one key interest rate further below zero. It trimmed the rate on deposits it takes from banks - from minus 0.4 per cent to minus 0.5 per cent, a penalty that pushes banks to lend excess cash.

The ECB, which sets policy for the 19 countries that use the euro, also said it would restart its bond-buying stimulus programme, which pumps newly created money into the financial system to lower borrowing costs and help the economy. It will buy €20 billion (S$30 billion) a month in government and corporate bonds for as long as needed.

The ECB also extended its promise to keep rates at record lows until inflation goes back up to its goal of just under 2 per cent. At last count, it was just 1 per cent.

The ECB has joined the US Federal Reserve and other central banks in making credit cheaper to help the economy. The Fed cut its key policy rate in July for the first time in a decade, to a range of 2 per cent to 2.25 per cent. Markets believe there is a near certainty the Fed will cut rates again at its next meeting.

Mr Draghi was able to push the stimulus package through the ECB's 25-member governing council despite scepticism voiced by several members.

The package ensures that the stimulus policies will influence the ECB's stance for months after Mr Draghi leaves office. Yesterday was his next-to-last meeting before his eight-year term ends on Oct 31. Ms Christine Lagarde, the outgoing head of the International Monetary Fund, is due to take his place and has endorsed Mr Draghi's measures.

The euro fell on news of the stimulus, to its lowest against the dollar since May 2017, while stock markets in Europe rose. The currency was down 0.6 per cent at US$1.0940.

Mr Neil Wilson, chief market analyst at Markets.com, said: "This was a kitchen sink job. Mario Draghi has done pretty much everything he could do with this one and is leaving the door open for Christine Lagarde to cut further."

In a nod to the fact that central banks alone cannot save the economy, Mr Draghi said it was "high time" for governments to get more involved in supporting the economy by spending on growth-friendly projects, among other things.

Economic growth in the euro zone has slowed to 0.2 per cent in the second quarter from the quarter before. Germany, the largest member of the euro zone, shrank by 0.1 per cent, putting it on the verge of a technical recession.

ASSOCIATED PRESS

A version of this article appeared in the print edition of The Straits Times on September 13, 2019, with the headline 'ECB cuts key rate, to restart bond buying'. Print Edition | Subscribe