Mario Draghi delivered interest-rate cuts, more bond purchases and a potential subsidy to lenders in a renewed attack against the threat of deflation, before whipsawing the euro by saying the European Central Bank is done with lowering borrowing costs for now.
The 25-member Governing Council, which met in Frankfurt on Thursday, reduced the rate on cash parked overnight by banks by 10 basis points to minus 0.4 percent and lowered its benchmark rate to zero. Bond purchases were increased to 80 billion euros ($87 billion) a month from 60 billion euros, and corporate bonds will now be eligible. A new series of long-term loans to banks will begin in June.
“The Governing Council expects key interest rates to remain at present or lower levels for long period of time and well past the horizon of our net asset purchases,” Draghi said. Based on the current view, “we don’t anticipate it will be necessary to reduce rates further.”
The euro reversed losses as the ECB president signaled a diminished prospect of further cuts. The currency dropped earlier after the initial package exceeded market expectations. Draghi has repeatedly said policy makers are willing to do what’s necessary to revive inflation and underpin the region’s upturn.
The 19-nation shared currency climbed 0.6 percent to $1.1067 as of 3:37 p.m. Frankfurt time, after earlier dropping as much as 1.6 percent.
The ECB president told a press conference in Frankfurt that:
Interest rates will remain at present or lower levels for an extended period of time
The outlook for growth has been revised down, reflecting weakening global prospects
2016 GDP revised down to 1.4% from 1.7%
2017 GDP revised down to 1.7% from 1.9%, GDP to be 1.8% in 2018
Inflation forecast for 2016 slashed to 0.1% from 1%
Inflation to be 1.3% in 2017, will average 1.6% in 2018
The central bank stopped short of introducing a tiered deposit rate, which had been the subject of speculation before the meeting.
“We’ve discussed for some time a tiering system, an exemption system,” Draghi said. “In end the Governing Council decided not to, exactly for the purpose of not signaling that we can go as low as we want on this.”
Investment-grade euro-denominated bonds issued by non-bank corporations established in the euro area will be included in the list of assets that are eligible for regular purchases under QE.
The ECB said its new round of targeted refinancing operations will start in June. The central bank said the interest rate “can be as low as the interest rate on the deposit facility,” indicating that the central bank may pay lenders to borrow from it.
Mario Draghi Speech About ECB Low Rates
The head of the ECB robustly defended its cheap money policy on Thursday against sharp criticism from Germany, as the country’s leader entered a debate that has driven a wedge between the euro zone’s central bank and its biggest economy.
Mario Draghi said the ECB’s policy of printing money and keeping borrowing costs at rock bottom was working, adding that interest rates would stay at current record lows for a long time.
Emphasizing the bank’s right to independence from political interference, Draghi also called on euro zone governments to help get the region’s sluggish economy on a more solid footing through economic reforms.
Speaking to reporters after the bank’s governing council held key rates, he said harsh criticism in Germany undermined the ECB and its attempts to buoy the economy, playing down complaints that low rates were squeezing savers.
“We obey the law, not politicians,” Draghi said, underscoring his commitment to the ECB’s primary task of keeping inflation ticking steadily up.
Criticism by politicians in Germany has escalated amid fears that the ECB could even start to hand out free or ‘helicopter money’ to citizens.
No sooner had Draghi spoken, German chancellor Angela Merkel took the unusual step of describing the debate about the ECB’s low interest rates as legitimate.
“That there are people in Germany who discuss the fact that interest rates have been much higher is legitimate,” she said, in an acknowledgement that savers’ concerns were genuine.
But he argued that there was little alternative to the ECB‘s course of money printing and low interest rates in a world where economic prospects were dim.
“Criticisms of a certain type could be viewed … as endangering the independence of the ECB,” he said, adding that this would delay investment.
“The result… is that it will take longer … to produce the results that we want,” he said, arguing that this would only result in further ECB action.
Draghi’s remarks were in response to increasingly bitter criticism in Germany, where savers, banks and fund managers have been vocal about the impact of low rates.
Finance Minister Wolfgang Schaeuble recently even argued that ECB policy was partly to blame for the rise of the right-wing anti-immigration Alternative for Germany (AfD).
Draghi answered personal criticism in Germany, where many associate his home country of Italy with economic mismanagement and where conservative politicians recently called for his successor to be a German.
While acknowledging the complaints of savers and banks about the impact of low interest rates, he said there was little alternative.
“Would a non-Italian president run different policies?” he said. “Our policies are the same policies that are being enacted in other parts of the world,” he said, referring to low-interest-rate policies globally, saying that the ECB’s governors from around the 19-country bloc stood behind him.
Draghi struck a more guarded tone than in an earlier press conference, although reiterated his pledge to act if there were to be an upset to the economy.
“We are going to have low inflation for a long time. We should be patient,” he said, pointing to the likelihood that price inflation would slip below zero in the coming months.
Inflation is a barometer of economic health and used as a yardstick of success for the ECB money printing.
When it slips below zero, investors typically look to the ECB to respond although Draghi’s call for patience could indicate that it will take its time.
Some economists nonetheless took heart. “The ECB is still on high alert and would be willing to implement even more stimulus if the recovery falters,” said Carsten Brzeski, an economist with ING.
The value of the euro, which typically rises or falls depending on how much ECB action investors expect, was flat following his remarks.
ECB governors from around the euro zone decided to keep the cost of borrowing for banks at zero while it will continue to charge them 0.4 percent for parking money at the ECB.
Central banks worldwide have been keeping money cheap. Sweden’s central bank expanded its asset-buying scheme on Thursday, despite the fact that its economy is in danger of overheating.
Despite a rally in oil prices, investors are still skeptical that price inflation in the euro zone will rebound in the long term.