The European Central Bank (ECB) has shocked markets with a cut deeper into negative territory and its president Mario Draghi also announced a broad based Quantitative Easing (QE) program that will have a sizable impact on the balance sheet. While there was no full consensus, the ECB was expected to leave the main lending rate at 0.15 percent and the deposit rate at -0.10 percent. In reality, the ECB has decided to cut its benchmark interest rate to 0.05 percent, after an earlier cut from 0.25 to 0.15 in June, while also becoming the first major central bank to introduce negative interest rates. At a news conference, Mario Draghi also announced the introduction of new stimulus measures – the launch of an asset purchase program, which will buy debt products from banks. Having faced an increasing pressure to kick-start the stuttering Eurozone economy, the ECB hopes that this move will channel more liquidity to the financial system and revive lending.
This move falls short of a program introduced by the U.S. Federal Reserve after the advent of the global financial crisis of 2007–08 referred to as quantitative easing in which the FED is directly involved in buying government bonds. Explaining the rationale of the ECB’s historic move, Mr Draghi explained that “The Eurosystem will purchase a broad portfolio of simple and transparent asset-backed securities with underlying assets consisting of claims against the euro area non-financial private sector under an ABS purchase program.” Further elaborating on the ECB’s purchases of the asset-backed securities, he then stressed that “This reflects the role of the ABS market in facilitating new credit flows to the economy and follows the intensification of preparatory work on this matter.” After the news about deep interest rate cut and the QE was announced, the euro fell to a one-year low against the dollar of $1.3011.
