European Central Bank launches new bond-buying program


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Mario Draghi, President of the European central Bank (ECB) attends a news conference on the outcome of the Governing Council meeting at the ECB headquarters in Frankfurt, Germany, March 7, 2019.

Kai Pfaffenbach | Reuters

The European Central Bank (ECB) announced a massive new bond-buying program Thursday in a bid to stimulate the ailing euro zone economy.

The central bank’s quantitative easing program will entail 20 billion euros ($21.9 billion) per month of net asset purchases for as long as it deems necessary.

The central bank also cut its main deposit rate by 10 basis points to -0.5%, a record low but in line with market expectations.

The ECB now expects interest rates to remain at their present or lower levels until it has seen its inflation outlook “robustly converge to a level sufficiently close to but below 2% within its projection horizon, and such convergence has been persistent.”

Additionally, the ECB changed its TLTRO (targeted long-term refinancing operations) rate to provide more favorable bank lending conditions and match that of its refinancing rate, erasing a previous 10 basis point spread.

A new system will see borrowers receive preferential rates if their eligible net lending exceeds a benchmark, providing an incentive for banks to use that money.

In line with market expectations, the ECB also introduced a two-tier rate system, a measure encouraged by the heads of various major European banks during the latest earnings season. More details are expected on this at a press conference later this afternoon.

Markets had widely expected some form of stimulus package, though hawks within the European Central Bank (ECB) Governing Council had moved in recent weeks to downplay the scale of the impending measures.

A slowing euro zone economy, persistent low inflation and the U.S.-China trade war had all pointed toward the central bank being forced to inject stimulus.

Recent economic data has not been promising, though the latest Purchasing Managers’ Indexes (PMIs) had indicated some stability despite enduring industrial weakness.

Market reaction

The pan-European Stoxx 600 index jumped 0.6% immediately after the first announcement, as markets reacted positively to ECB President Mario Draghi delivering on expectations of a “bazooka” stimulus package.

Euro zone bond yields tumbled and the euro weakened as a result of the new measures. Germany’s benchmark 10-year bond yield tumbled 8 basis points to -0.64% while the euro slid back below $1.10.

European banking stocks plunged, however, giving back early gains to slip 0.9% below the flatline.

Artur Baluszynski, head of research at Henderson Rowe, said the ECB pushing rates further into negative territory is “essentially a tax on euro zone banks, and for the already weakened bank-financed economy like the euro zone, this move could spell more trouble.”

“Also, with the Fed still being the tightest of the G-7 central banks, the eurodollar liquidity could come under pressure adding further stress to the increasingly challenged European banking system,” he added.


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