European Central Bank President Mario Draghi unleashed a massive quantitative easing programme on Thursday, the size of which exceeded market expectations, determined to combat the threat of deflation and revive the euro area economy.
The widely expected quantitative easing measure was described by Draghi as "an expanded asset purchase programme". Under the plan, the combined monthly purchases of public and private sector securities will amount to EUR 60 billion ($70 billion), he said.
In response to the ECB announcement, the euro weakened and the Euro Stoxx strengthened to fresh 7-year highs. Earlier today, the bank left its interest rates unchanged for the fourth straight month.
The main refi rate was kept at a record low 0.05 percent and the deposit rate at -0.20 percent. The marginal lending rate was retained at 0.30 percent.
The size of monthly asset purchases exceeded the EUR 50 billion reported in the press since Wednesday. With the latest decision, Draghi has crossed the Rubicon to join ECB's peers US Federal Reserve and Bank of Japan who took the QE route long back.
Previously, Draghi revealed his daring by entering the uncharted territory of negative interest rates last June in his mission to defend the ECB's price stability target.
His resolve must have been strengthened by last week's EU court backing for ECB's earlier bond-buying programme known as the Outright Monetary Transactions. That said, the German opposition to stimulus, especially ECB purchases of state debt, remains.
Adding pressure, Eurozone inflation turned negative in December for the first time in more than five years in December with consumer prices falling 0.2 percent. Falling oil prices are set to make the picture murkier. High unemployment is another grave concern.
The asset purchases are intended to be carried out until end-September 2016. They will remain in place until there is "a sustained adjustment in the path of inflation which is consistent with" the ECB's aim of achieving inflation rates below, but close to, 2 percent over the medium term, Draghi said in his customary post-decision press conference in Frankfurt.
"In March 2015 the Eurosystem will start to purchase euro-denominated investment-grade securities issued by euro area governments and agencies and European institutions in the secondary market," he added.
The asset purchases will be based on the national central banks' (NCBs) shares in the ECB's capital key. Further, additional criteria will be applied for countries under the EU/IMF adjustment programme.
The ECB will co-ordinate the asset purchases to safeguard the single monetary policy, Draghi said. Under the plan, purchases of securities of European institutions will be 12 percent of the total purchases. These will be purchased by NCBs and will be subject to loss sharing.
The rest of the debt purchased by NCBs will not be subject to loss sharing. The ECB will hold 8 percent of the asset purchases. Hence, 20 percent of the additional asset purchases will be open for risk sharing.
The Governing Council also decided to lower the interest rates on the remaining six targeted longer-term refinancing operations or TLTROs by 10 basis points. Draghi said Eurozone inflation dynamics have continued to be weaker than expected, while economic slack remains sizeable and money and credit developments are still subdued. He also noted that earlier quantitative measures proved insufficient to adequately address heightened risks of too prolonged a period of low inflation.
"The adoption of further balance sheet measures has become warranted to achieve our price stability objective, given that the key ECB interest rates have reached their lower bound," Draghi said.
"Today's measures will decisively underpin the firm anchoring of medium to long-term inflation expectations. The sizeable increase in our balance sheet will further ease the monetary policy stance."
While saying that risks surrounding the economic outlook for the euro area remain on the downside, Draghi hoped the latest stimulus measures as well as the sustained fall in oil prices would diminish those risks. The ECB expects euro area inflation to remain very low or negative in coming few months. Draghi said such inflation rates were unavoidable in the backdrop of falling oil prices.
Inflation rates are expected to increase gradually toward the ECB's 2 percent target later in 2015 and in 2016, he said.
Elsewhere, Denmark's central bank cut its deposit rate by 15 basis points, taking it deeper into negative territory, apparently in an effort to thwart further appreciation of the krone that is pegged to the euro, after the ECB stimulus announcement.
The certificate of deposit rate was reduced by 0.15 percentage point to -0.35 percent, the Danmarks Nationalbank said in a statement. The lending rate remains at 0.05 percent. It was the second reduction by the central bank this week.
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