ECB cuts rates and boosts QE to ratchet up eurozone stimulus, FT article, 11/03/2016

The European Central Bank has unleashed a bigger-than-expected package of measures to stimulate the eurozone economy, with expanded quantitative easing, incentives to banks to increase lending and further interest rate cuts.
The ECB cut its deposit rate by 10 basis points yesterday to minus 0.4 per cent but eased the impact on banks with cheaper short-term loans and longer-term liquidity at negative interest rates — essentially paying eurozone lenders to increase credit to households and companies.
Mario Draghi, ECB president, said interest rates would stay low for “an extended period” and he kept open the option of a further cut. But he added his voice to growing unease about negative rates among top central bankers, saying he did not anticipate pushing deeper into negative territory, partly because of the impact on banks.
“Does it mean we can go as low as we want without having any consequences on the banking system? The answer is no,” the ECB president said.
His comments on rates triggered a surge in the euro to $1.12, a near 2 per cent rise on the day, after it earlier plunged on the news of the ECB’s measures.
Analysts interpreted the measures as a recalibration of the ECB’s armoury, putting more ammunition into reinforcing the eurozone’s economy and less into weakening the currency.
The ECB raised the amount of bonds the eurozone’s central bankers buy each month under QE from €60bn to €80bn — a greater amount than many analysts had expected. It also expanded the range of assets it will buy to include high quality corporate bonds.
To help banks, it will provide liquidity through targeted longer-term refinancing operations, with rates as low as minus 0.4 per cent — in effect paying them to borrow money. The idea was tabled at a meeting of the ECB’s governing council only yesterday morning. It was viewed as a radical signal of the central bank’s intent to have as much impact on growth and inflation as it has had on financial markets. “A central bank lending at minus 0.4 per cent is a pretty big deal whichever way you cut it,” said Richard Barwell, economist at BNP Paribas Investment Partners.
The main refinancing rate was also cut by 5 basis points to 0 per cent.
Not all ECB policymakers backed the package, which included cuts to all the central bank’s benchmark interest rates. The vote in favour was 19 to 2, with dissenting votes cast by the head of the Dutch central bank, Klaas Knot, and Sabine Lautenschläger, the German member of the ECB governing council.
The ECB sharply downgraded its inflation forecast to 0.1 per cent this year, from the 1 per cent it had predicted in December. Mr Draghi said it was “crucial” to avoid very weak inflation taking hold across the economy.
Shares in eurozone banks rallied sharply after the ECB announcement, but later gave up most of their gains.
The ECB opted against helping banks by introducing a tiered rate scheme. Mr Draghi said it did so out of a “desire not to signal we can go as low as we want” but also because of the complexity of the eurozone’s banking system.

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