European Central Bank introduces aggressive stimulus package to revive ailing economy

European Central Bank introduces aggressive stimulus package to revive ailing economy

European Central Bank introduces aggressive stimulus package to revive ailing economy

Stocks eked out a gain on optimism about the outlook for a trade agreement between the US and China and after Europe's central bank announced a fresh round of stimulus. It also said it would purchase €20bn (£17.7bn) a month in government and corporate bonds for as long as necessary.

Such a formulation suggests that purchases could go on for years.

Sources told Reuters the BOJ is leaning toward standing pat next week if markets are calm, but is brainstorming ways to deepen negative interest rates at minimal cost. Negative interest rates are meant to encourage banks to lend to consumers and businesses, rather than park their money with the ECB. The ECB said it would compensate lenders for part of this charge to ensure they continued to lend to the real economy.

Fed funds rate futures imply a 0.25 percentage point interest rate cut by the Fed next week but have effectively priced out any chance of a larger cut.

"The Governing Council now expects the key European Central Bank interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics", while the bloc's common currency, Euro dropped more than 120 pips to $1.0945 against its American coutnerpart in less than an hour after release of the European Central Bank decision to cut key interest rate.

Thursday's rate cut, restart of bond-buying and a policy package to prop up slowing economy in the euro zone are generally in line with market expectations.

ECB President Mario Draghi made the announcement Thursday to address the growing instability in the European economy.

The euro lost three-quarters of a cent against the USA dollar after the European Central Bank announced the rate cut and revamp of QE, dropping to $1.0927. The euro gained and bonds were mixed.

Attention now turns to Draghi's 1230 GMT news conference at which he will also reveal the bank's new economic projections.

Mr Draghi is due to make way for incoming ECB President Christine Lagarde on 1 November.

Although Wall Street widely expects the Federal Open Market Committee to make another quarter-point cut during its meeting next week, borrowing costs will nearly certainly remain well above zero (currently, the range is set between 2 percent and 2.25 percent) in the short term.

The bigger-than-expected stimulus will increase pressure on the U.S. Federal Reserve and Bank of Japan to ease policy next week to support a world economy increasingly characterized by low growth and protectionist threats to free trade.

Not easing in sync with the Fed risked pushing the euro higher, which would then dampen inflation and put the bank even further away from its targets. Council members including Jens Weidmann and Klaas Knot, central bank governors for Germany and the Netherlands, respectively, came out against the move.

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