The euro climbed higher against the U.S. dollar on Thursday, after the European Central Bank (ECB) said it would delay its first post-crisis interest rate hike until at least the middle of next year.
In a move that was well-flagged, ECB President Mario Draghi also offered to pay banks if they borrow cash from the central bank and pass it on to households and firms.
Trade tensions and fears of a global recession have put markets in a state of flux this week, with market participants increasingly hopeful ECB President Mario Draghi could signal a late burst of monetary support before his term ends in October.
The central bank said the interest rate on its main refinancing options and the interest rates on its marginal lending facility and deposit facility would remain unchanged at 0%, 0.25% and -0.40%, respectively. These have been at record lows following the euro sovereign debt crisis of 2011 in an effort to boost inflation and stimulate growth.
In a surprise revision to its forward guidance, the ECB said in a statement that the governing council "now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020."
The euro climbed 0.6% to reach a seven-week high of $1.1290 at around 1:45 p.m.
"The prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets is leaving its mark on economic sentiment," Draghi said, as he addressed reporters during a news conference in Vilnius, Lithuania.
"Looking ahead, the governing council is determined to act in case of adverse contingencies."
Draghi explained the governing council "stands ready to adjust all its instruments as appropriate." This should ensure inflation continues to move towards the ECB's aim in a "sustained manner."
Revised forecasts
Meanwhile, Draghi also presented a fresh round of forecasts for economic growth as well as inflation. According to the forecasts, the ECB sees GDP growth of 1.2 percent in 2019, up 0.1 percentage points from its previous forecast in March. For 2020, the ECB forecast the economy to grow at 1.4 percent, down 0.2 percentage points as compared to its previous forecast.
The ECB slightly raised its inflation forecasts for 2019 to 1.3 percent - up 0.1 percentage point from from its previous forecast in March. Meanwhile, for 2020, the ECB revised its forecast to 1.4 percent - down 0.1 percentage points from its earlier forecast in March.
"There is no probability of deflation, there is very low probability of recession, there are no threats of de-anchoring of inflation expectations," Draghi said.
'Playing to the markets'
"It is more dovish than we probably expected ... But I wouldn't say the ECB is really getting ahead of the curve," Florian Hense, European economist at Berenberg, told CNBC's Julianna Tatelbaum on Thursday.
Hense said he believed the ECB's revised forward guidance showed the central bank was happy to follow in the footsteps of the Federal Reserve by "playing to the markets."
The ECB's interest rate announcement comes at a time when the mood has shifted among some of its global peers. Australia's central bank cut interest rates for the first time in three years on Tuesday, while the U.S. Federal Reserve has recently signaled an openness to easing if necessary.
Meanwhile, India's central bank cut its benchmark interest rate for third time this year on Thursday and expectations are building that the Bank of Japan could also add stimulus soon.
TLTRO
In April, Draghi said policymakers at the ECB would look at how monetary policy is working when setting the terms for its new cheap loan program for banks — the TLTROs (targeted longer-term refinancing operations).
Essentially, these loans should make the euro zone's banks lend more to the real economy. They have a negative deposit rate so they would pay lenders for taking the cash, meaning it's a strong incentive for the banks to use them.
"The rate in each TLTRO III-operation will be 10 basis points above the average rate applied in main refinancing operations over the life of respective TLTRO, and as low as the average deposit facility rate plus 10 basis points for banks exceeding a certain lending benchmark," Draghi said on Thursday.