ECB restarts bond-buying program

The European Central Bank yesterday restarted its quantitative easing program to prop up a still ailing eurozone economy.

Julia Horowitz had the news for CNN:

The European Central Bank is turning on the stimulus taps again, pushing interest rates further into negative territory in order to support the region’s flagging economy.

The central bank said Thursday that it would cut its interest rate for deposits by 10 basis points to minus 0.5%, and keep them there or lower until the inflation outlook improves.

It also announced that it would start printing money again, promising to buy €20 billion ($22 billion) in bonds and other financial assets per month starting in November. The bank said it would continue the purchases for “as long as necessary.”

Negative rates penalize banks for holding cash rather than lending it out, while bond-buying helps to drive down yields, reducing the cost of borrowing for governments and companies.

The ECB also said it would take steps to shield banks from the effects of negative rates, which have been hurting the region’s lenders for years.

Yusuf Khan from Business Insider reported:

The move marks the first time the deposit rate has changed since 2016, as Europe’s economy has struggled amid losses in demand both from Brexit and the trade war. Quantitative easing was most recently used in December.

On its website, the ECB said the key interest rates would remain at current levels until inflation hit 2%.

“Taken as a whole the ECB has delivered a package of measures which is more than most expected today,” Andrew Kenningham, the chief Europe economist at Capital Economics, told Markets Insider in an email. “Admittedly, the 10 basis point cut to the deposit rate was the least that it could have done and the monthly pace of asset purchases, at €20 billion beginning on 1st November, was a bit smaller than expected.

“But the key point is that this commitment to more QE is open-ended: it will end shortly before the bank begins raising interest rates.”

CNBC’s Elliot Smith quoted ECB president Mario Draghi:

In a press conference following the decision, ECB President Mario Draghi urged governments to take fiscal measures to supplement the central bank’s monetary stimulus and reinvigorate the euro zone economy.

“In view of the weakening economic outlook and the continued prominence of downside risk, governments with fiscal space should act in an effective and timely manner,” Draghi said.

“In countries where public debt is high, governments need to pursue prudent policies that will create the conditions for automatic stabilizers to operate freely. All countries should reinforce their efforts to achieve a more growth-friendly composition of public finances,” he added.

Draghi added in his press conference: “In order to support the bank-based transmission of monetary policy, the Governing Council decided to introduce a two-tier system for reserve remuneration, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.”