ECB Cuts Key Interest Rates Amid Deflation Worries
The measures largely consist of interest rate cuts to stimulate bank lending. Europe's main interest rate has remained at 0.25% since November, but on Thursday, the ECB announced the rate would drop to 0.15%. The overnight deposit rate for banks to park money at the ECB has also been lowered to -0.1%. The rationale behind a negative deposit rate means banks would pay the ECB to hold money there, making it more attractive for banks to lend to consumers and businesses instead.
More bank lending could move the eurzone's inflation rate, currently at 0.5%, according to Eurostat, higher. Inflation has been on the decline lately, dropping from 0.7% in April. The ECB's inflation target is just under 2%.
Deflation, or falling prices, is a concern for central bankers since consumers generally delay purchases in anticipation of scoring a better deal in a few months. A lag in consumer spending hurts economic growth.
"The measures will contribute to a return of inflation rates to levels closer to 2%," said ECB President Mario Draghi in a press conference.
European stocks rose in response to the news. Germany's DAX closed up 21.16, 0.21% at 9,947.83. The Stoxx Europe 600 index jumped 1.43, 0.42% at 344.99.
"The equities markets are a good real-time indicator and the rate cut was taken positively by stocks," said senior international strategist Sameer Samana at Wells Fargo Advisors, with $1.4 trillion in assets under management.
A weaker euro would help Europe's economy, as European exports would be more attractive to other countries. On Thursday, the euro gained strength against the dollar, closing at 1.3656, up 0.42% on Thursday.
"I was surprised to see the Euro rise, but I think this was a good knee-jerk reaction," Samana says. "Going forward, as this news fades, if the equities and currencies markets dip, this will show investors are concerned that the ECB isn't doing enough."
Still, some investors wonder if the latest measures are enough. Draghi hinted at a possible quantitative easing program during the last meeting of the ECB in May , but the ECB has yet to propose a concrete bond stimulus program.
While quantitative easing was heavily relied upon in the United States by the Federal Reserve and helped boost the housing market, such a stimulus may not be as effective in Europe. The housing market isn't as robust in Europe and bond buying across multiple countries at different levels of economic strength would be more difficult to pull off.