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European Central Bank cuts interest rates to record low; ASX to rise

13 September 2019

The ECB cut its deposit rate by 10 basis points to a record low of -0.5 per cent, promised that rates would stay low for longer and said it would restart bond purchases at a rate of €20-billion a month from November 1. Inflation has begun to fall, the continent is feeling the effects of the trade war between China and the USA, and Germany, Europe's largest economy, has been teetering on recession.

Turkey's lira rallied after its policy makers cut interest rates by more than forecast.

The Fed cut its key policy rate in July for the first time in a decade, to a new range of 2 percent to 2.25 percent. Analysts say that will pump cash into the market.

Yet there were doubts, even within the European Central Bank itself, as to whether the latest measures - most of the few remaining tools in its monetary policy arsenal - would be enough to stoke a euro zone recovery in the face of a U.S.

European Central Bank cuts interest rates to record low; ASX to rise
European Central Bank cuts interest rates to record low; ASX to rise

"The outlook is weighed down by high uncertainties", said IFO's Timo Wollmershauser, pointing to possible risks to the economy from a no-deal Brexit and an escalation of US President Donald Trump's trade wars.

Despite growing resistance, markets expected the European Central Bank to move ahead with bond buying in the lead up to the decision.

It also changed the modalities of its quarterly targeted longer-term refinancing operations (TLTRO III) "to preserve favorable bank lending conditions, ensure the smooth transmission of monetary policy and further support the accommodative stance of monetary policy", including an extension of the maturity from two to three years.

Unveiling the stimulus package to avert a deeper slowdown, Draghi said: "The package is quite powerful, both in the short term but also in the long run". They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting US exports.

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But dissident policymakers grew more vocal in their resistance to stimulus in the weeks leading up to the decision.

"The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt", Trump tweeted on Wednesday.

Yet the size and design of the scheme underwhelmed bankers whose own loans are being offered at rock-bottom rates.

The ECB also will also introduce a tiered system to exclude some of the banks that would be suffering from negative rates - something that has been done in Japan and Denmark already.

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Reinvestments of the principal payments from maturing securities purchased under the APP will continue for an extended period of time past the date when the European Central Bank starts raising its key interest rates, and "in any case for as long as necessary", it said.

"Now it is high time for the fiscal policy to take charge", Draghi said.

He said that incoming economic data since last meeting showed "a more protracted weakness in the euro area economy, the persistence of prominent downside risks and muted inflationary pressures".

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European Central Bank cuts interest rates to record low; ASX to rise