The European Central Bank has cut its main interest rate from 0.05% to 0% as part of a package of measures intended to revive the eurozone economy.
The bank will also expand its quantitative easing programme from €60bn to €80bn a month.
The ECB also decided to further cut its bank deposit rate, from minus 0.3% to minus 0.4%.
The measures, including the decision to cut the main interest rate, were more radical than investors had expected.
John Hardy, head of currency strategy at Saxo Bank, said: “This was a much bigger bazooka than the market was expecting and shows the ECB trying to get ahead of the confidence curve after learning its lesson in December.”
The stimulus measures announced three months ago have largely failed to drive economic growth higher or boost inflation.
Inflation alert
ECB president Mario Draghi told a news conference in Frankfurt that it had cut eurozone inflation projections to reflect the recent decline in oil prices.
The bank now expected inflation to be just 0.1% this year – substantially lower than the previous estimate of 1% and underlining the need for the bank to go further than expected.
Inflation should rise to 1.3% in 2017 and 1.6% the following year, according to its estimates.
“We are not in deflation,” Mr Draghi stressed.
He also warned that risks to economic growth across the 19 countries that use the euro remained “tilted to the downside”.
The ECB cut its growth forecasts to an increase of 1.4% this year – down from 1.7%; 1.7% for 2017 – down from 1.9%; and 1.8% for 2018.
The governing council expected the bank’s key interest rates “to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases”.
The bond-buying programme will continue at least until the end of March 2017.
As well as government debt, the bank will now be allowed to use its newly printed money to buy bonds issued by companies as well. That scheme will start towards the end of the second quarter this year.
The euro initially fell 1% against the US dollar, but soon recovered to be trading 1.4% higher and $1.1149. A weaker euro makes European exports cheaper, so the rise will not be welcomed by manufacturers.
European stock markets also rose sharply following the announcement but then reversed direction, with Frankfurt closing down 2.3%, Paris ending 1.7% lower and the FTSE 100 in London shedding 1.8%. Sharp rises for European banks were also largely wiped out.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the ECB was now “plumbing the depths of monetary policy in a bid to stave off the encroaching threat of sustained deflation in Europe”.
“It’s hard to see even lower rates and more QE in Europe as a positive development. The fact the ECB is still pursuing such extreme monetary policy paints a depressing picture of the European economy, and markets are beginning to question what central banks have left in the locker if the global economy slips back towards recession,” he said.
Source: BBC
