European Central Bank cuts key rate, approves new round of bond purchases

ECB president Mario Draghi hand overs to Christine Lagarde in November but low inflation still haunts the eurozone

ECB president Mario Draghi hand overs to Christine Lagarde in November but low inflation still haunts the eurozone

While the trade war tensions seem to be easing, with stocks climbing and risk appetite returning in droves to financial and commodity markets, EUR/JPY is up 0.79% on the United States session so far following what has been perceived as a hawkish rate cut from the European Central Bank earlier today. They get paid to borrow money, while we are paying interest!' he said.

A 10 basis point cut in the ECB's deposit rate to -0.5 per cent was fully expected but the revived bond purchases exceeded many expectations because they are set to run until "shortly before" the European Central Bank raises interest rates.

'European Central Bank, acting quickly, Cuts Rates 10 Basis Points.

The theory goes that different levels of interest rates will help banks protect profits and enhance their ability to lend while allowing the ECB to pull rates even lower into negative territory if needed.

It also said it would purchase 20 billion euros a month in government and corporate bonds for as long as necessary.

The United States on Thursday welcomed China's renewed purchases of US farm goods while maintaining the threat of USA tariff hikes as the world's two largest economies prepared the ground for talks aimed at breaking the logjam in their trade war. It recently spread to Germany's service sector too.

"Risk assets should find further support from accommodative policies, which are set to remain in vogue for some time, and not just in Europe as seen in the global easing trend", said Esty Dwek, head of global market strategy at Natixis.

On its website, the European Central Bank also said that the key interest rates will remain at the level they are now till inflation hits 2%. But the euro later swapped the slump for a 0.4 per cent gain.

The U.S. S&P 500 closed within striking distance of its all-time closing high, rising 0.29% to 3,009.57, near record closing high of 3,024.50 marked in late July.

The stimulus package is also expected to be the final action by the outgoing Draghi, whose term ends November 1.

'The ECB were slow to react to the 2008 crisis and are still suffering from the consequences, ' he said.

Given that markets do not expect rates to rise for almost a decade, such a formulation suggests that purchases could go on for years, possibly through most of Christine Lagarde's term leading the bank.

'But let's face it, neither of them truly think [exchange rates are the target] and this is more of a case of a central banker being drawn into a political argument that he'd rather steer clear of, ' said Craig Erlam from Oanda.

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