Mario Draghi signaled at least 700 billion euros ($906b) of fresh aid for his moribund economy and left a fight with Germany over sovereign-bond purchases for another day.
Pledging to "significantly steer" the European Central Bank's balance sheet back toward the 2.7 trillion euros of early 2012 from 2 trillion euros now, the ECB president announced a final round of interest-rate cuts and a plan to buy privately owned securities, Arab News reported Saturday.
His mission: To revive inflation in the 18-nation euro area.
Fully-fledged quantitative easing as deployed in the United States and Japan wasn't enacted amid a split on the 24-member Governing Council, with Bundesbank President Jens Weidmann opposing the new stimulus and others seeking more. The latest round of measures pushed the euro below $1.30 for the first time since July 2013 and sent European bond yields negative.
The steps "probably reflect that President Draghi does not have unanimity, or a large enough majority for quantitative easing," said Andrew Bosomworth, a Munich-based portfolio manager at Pacific Investment Management Co. and a former ECB economist. "The ECB is ready to do more if more is needed."
Inflation Languishing
With euro-area inflation languishing at 0.3 percent last month, a fraction of the ECB's 2 percent goal, and Draghi saying price expectations are worsening, policymakers unexpectedly cut interest rates. The benchmark and deposit rates fell by 10 basis points to 0.05 percent and minus 0.2 percent, respectively.
That may help encourage companies and households to spend rather than save. It could also attract greater participation in a targeted lending program for banks that was unveiled in June and starts this month. Banks can borrow from the ECB for as much as four years at a small premium to the benchmark rate.
The rate cuts mark the bottom line for conventional monetary policy. Declaring that the ECB can now reduce them no more, Draghi committed to buying so-called asset-backed securities and covered bonds in the hope that will funnel cash into an economy which stalled in the second quarter and where lending has been shrinking for more than two years.
ABS are packaged securities backed by underlying instruments such as mortgages or credit-card debt, containing slices with different risk profiles. The covered-bond purchases will revive a measure that the ECB ended in 2012.
Meanwhile, the Australian dollar hit a 15-month high against the euro overnight following the surprise announcement by the European Central Bank to cut its benchmark interest rate.
The local currency jumped to as high as 72.44 euro cents overnight, gaining nearly 2 percent since Thursday. It continued to trade around 72.21 euro cents in early trade on Friday.
Against the US dollar, It briefly spiked to over US93.90 following the ECB surprise cut but quickly eased back to the Thursday trading level of 93.50.
Analysts said the Australian dollar was likely to continue to rally against the euro.
"Given the low volume environment, we retain our view that there is scope for EUR to continue to underperform currencies where economies are performing better and interest rates are higher, such as the AUD, CAD, and NZD," Commonwealth Bank of Australia senior currency strategist Peter Dragicevich said in a note.
