The European Central Bank has announced a fresh stimulus package in an attempt to prevent the fragile eurozone economy from grinding to a halt, with an interest rate cut and plans to pump €20bn (£19bn) a month into the financial markets.
In one of his final acts in his ECB presidency, before Christine Lagarde takes charge in November, Mario Draghi said governments across the eurozone needed to take greater steps to reboot growth by ramping up public spending or cutting taxes.
In a thinly veiled rebuke to Germany, which has among the strongest government finances in the world, Draghi said that eurozone nations with solid finances had to take swift steps to support growth by loosening their purse strings.
After years of support from the central bank to sustain growth in the decade since the financial crisis, he said: “Now it’s high time I think for the fiscal policy to take charge. In view of the weakening economic outlook and the continued prominence of downside risks, governments with fiscal space should act in an effective and timely manner.”
Draghi’s comments came as the ECB announced it would step in to support the 19-nation currency bloc by revamping its quantitative easing (QE) programme of bond buying. Starting from November, the central bank will buy €20bn of bonds a month from commercial banks in an attempt to inject more money into the economy.
The move restarts a programme paused by the ECB in December after the purchase of €2.6tn of bonds since first use of QE in 2015.
The ECB also said it would cut its deposit rate – the interest paid to commercial banks when they place funds with the central bank – by 0.1 percentage points to a new all-time low of -0.5%, meaning banks would incur charges on any balances they kept there. Negative interest rates are meant to encourage banks to lend to consumers and businesses, rather than park their money with the ECB.
The stimulus package comes as the eurozone economy falters alongside a broader global economic slowdown that has been triggered by rising trade protectionism and the US-China trade war.
Factory output has slumped in response to diminishing international trade volumes as Washington and Beijing have imposed punitive tariffs on each other’s goods, while business investment has fallen against the uncertain political backdrop.
Eurozone growth fell to 0.2% in the second quarter of 2019, from 0.4% in the first three months of the year, while some economies, including those of Italy and Germany, are flirting with recession.
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.”
The central bank said its QE programme would remain in place for as long as necessary to reinforce its impact.
The outgoing president of the ECB said he expected interest rates to remain at their present or lower levels until inflation accelerated across the eurozone. While the ECB has a target for inflation of below, but close to, 2% over the medium term, inflation has remained muted amid weaker economic growth.
The ECB’s support for the eurozone economy comes at a tense political moment as Donald Trump attempts to apply pressure on the US Federal Reserve to cut interest rates as the American economy falters.
In critical comments less than an hour after the ECB decision, Trump used a tweet to attack the Fed for its lack of action. “European Central Bank, acting quickly, Cuts Rates 10 Basis Points. They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports.... And the Fed sits, and sits, and sits. They get paid to borrow money, while we are paying interest!”
Trump has also previously been critical of the ECB for supporting the eurozone economy, arguing that it would be detrimental to US interests.
The Fed cut interest rates in July for the first time in more than a decade, signalling at the time a readiness to provide more support to the US economy if necessary.
The euro initially fell agains the US dollar after the ECB announcement before rallying by about 0.6% on the American currency to trade at $1.1073.