Central Banks

ECB signals a rate cut, more monetary easing ahead

Key Points
  • The central bank said it expects its key interest rates to remain "at their present or lower levels" at least through the first half of 2020.
  • This is an update on the wording in previous statements and suggests a rate cut could be on the horizon.
  • But Draghi told reporters Thursday that the risk of a recession in the region was low.
'Significant degree' of monetary stimulus necessary, ECB's Draghi says

The European Central Bank (ECB) prepared markets for more easing measures on Thursday, causing the euro to briefly fall to a two-year low against the dollar.

The central bank said it expects its key interest rates to remain "at their present or lower levels" at least through the first half of 2020, updating the wording on previous statements and suggesting a rate cut could be on the horizon.

ECB President Mario Draghi said at a following press conference on Thursday that "a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable and support the euro area expansion."

The bank also signaled that there could be additional measures to stimulate the euro zone economy. It said it was examining options, "such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases."

This means that it may lower the charge that banks have to pay to park their excess cash at the ECB. It also said it was looking at a reintroduction of a quantitative easing program in the coming months. Quantitative easing, or large-scale asset purchases, is where it purchases government bonds from euro zone countries in order to further boost lending and stoke inflation.

Risks around euro area tilted to the downside, ECB's Draghi says

Draghi's more mixed message

The euro hit a two-year low of $1.1103 after the ECB's change in guidance, while the German 30-year bond yield hit a record low of 0.167%, according to data from research firm Refinitiv. However, both the euro and bonds snapped back after Draghi suggested that some members of the ECB weren't convinced on certain aspects of a possible stimulus package.

Draghi told CNBC's Annette Weisbach that all ECB members agreed that further stimulus was needed, though there were differences regarding the various elements of any program. "We had a broad discussion," he said, "Whenever we have a package so complex as this, you'd expect that people have different nuances about the different parts of the package."

Draghi also told reporters Thursday that the risk of a recession in the region was low, giving a more mixed message than the earlier statement. This sent the euro even higher, hitting $1.1153 at around 2:15 p.m. London time.

Economic outlook is getting worse and worse, ECB President Draghi says

Sintra speech

Draghi warned last month that without a clear improvement for the euro zone economy, the central bank would announce further stimulus measures. This caused market players to up their forecasts for new interest rate cuts or even a bond-buying program. Draghi, speaking in June in Sintra, Portugal, made it clear that his institution was ready to use all necessary measures to revamp the flagging economy.

Data out Wednesday further highlighted the recent weakness, showing German manufacturing PMIs (Purchasing Managers' Index) falling to 43.1 in July from 45.0 in June. At the same time, new orders in the country dropped at their fastest pace since July 2012, on the back of weakness in Chinese demand and in the auto sector.

The ECB had embarked on a major stimulus package following the sovereign debt crisis of 2011. This included cutting interest rates to record lows, purchasing government bonds and facilitating more lending to euro zone banks. The bank tried to normalize its policy last year — and catch up with other central banks like the U.S. Federal Reserve — but with global trade wars and softness in China most of these banks have now signaled a U-turn. In the U.S., investors now believe there's an 80% chance that the Fed announces a 25 basis point cut when it meets next week.

ECB prepared for further downside in the economy, strategist says