The European Central Bank cut its deposit rate below zero and said it would announce further measures later today as policy makers try to counter the prospect of deflation in the world’s second-largest economy.
ECB President Mario Draghi reduced the deposit rate to minus 0.10 percent from zero, making the institution the world’s first major central bank to use a negative rate. Policy makers also lowered the benchmark rate to 0.15 percent from 0.25 percent. Draghi will hold a press conference at 2:30 p.m. in Frankfurt.
The promise of further measures today “has stoked up hopes that the ECB is going to unleash a huge bazooka on the market in the press conference,” said Philip Shaw, chief economist at Investec Securities Ltd. in London. While he thinks that quantitative easing is “very unlikely” now, “it may well be that what the ECB just said is stoking up hopes that QE could be on the cards after all. ”
The euro fell to the lowest in four months after the move. Draghi has said a worsening in the medium-term outlook for prices would justify broad-based asset purchases, and with inflation stuck well below the ECB’s goal for the past eight months and revised staff forecasts due today, that’s a scenario that remains possible. While he’s unlikely to announce a QE program immediately, he may keep the option alive by providing insight into how a plan could overcome the practical challenges it faces in an 18-nation currency union.
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