The European Central Bank has announced a fresh stimulus package in an attempt to prevent the fragile eurozone economy from grinding to a halt, with an interest rate cut and plans to pump €20bn (£19bn) a month into the financial markets.
In one of the final acts of Mario Draghi’s presidency before Christine Lagarde takes charge of the ECB in November, the central bank said it would reboot its quantitative easing (QE) programme of bond buying in that same month.
The ECB will also cut its deposit rate – the interest paid to commercial banks when they place funds with the central bank – by 0.1 percentage points to a new all-time low of -0.5%, meaning banks incur charges on any balances they keep there. Negative interest rates are meant to encourage banks to lend to consumers and businesses, rather than park their money with the ECB.
Trump hits out as ECB’s Draghi urges governments to spend more – business live
The stimulus package comes as the eurozone economy falters alongside a broader global economic slowdown that has been triggered by rising trade protectionism and the US-China trade war.
Factory output has slumped in response to diminishing international trade volumes as Washington and Beijing impose punitive tariffs on each other’s goods, while business investment has fallen against the uncertain political backdrop.
Eurozone growth slumped to 0.2% in the second quarter of 2019, from 0.4% in the first three months of the year, while some economies, including Italy and Germany, have come close to the brink of recession in recent months.
Unveiling the stimulus package to avert a deeper slowdown, Draghi said: “The package is quite powerful, both in the short term but also in the long run.”
The outgoing president of the ECB said he expected interest rates to remain at their present or lower levels until inflation accelerates across the eurozone. While the ECB has a target for inflation of below, but close to, 2% over the medium term, inflation has remained muted amid weaker economic growth.
The euro lost three-quarters of a cent against the US dollar after the ECB announced the rate cut and revamp of QE, dropping to $1.0927.
The ECB’s support for the eurozone economy comes at a tense political moment as Donald Trump attempts to apply pressure on the US Federal Reserve to cut interest rates as the American economy falters.
In critical comments less than an hour after the ECB decision, Trump used a tweet to attack the Fed for its lack of action: “European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports…. And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”
Trump has also previously been critical of the ECB for supporting the eurozone economy, arguing that it would be detrimental to US interests.
Draghi said that eurozone countries with solid public finances should increase their spending to reboot economic growth, after years of monetary policy support from the central bank.
He said the governing council had been unanimous in its view that governments should provide greater support, adding: “Now it’s high time I think for the fiscal policy to take charge.”