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ECB charts path for new stimulus

[FRANKFURT] The European Central Bank (ECB) signalled Thursday it could unleash a new stimulus package and slash rates further, in a bid to shore up stubbornly low inflation and kickstart sluggish growth in the euro zone.

The change in monetary policy direction came as clouds darken outside the bloc, with growing fears over US-led protectionism, the danger of a no-deal Brexit, weakness in emerging markets and geopolitical risks, dampening the economic mood.

The expansionary tone also came ahead a week before the US Federal Reserve's policy meeting, when the American central bank is expected to cut rates for the first time in a decade.

During their meeting on Thursday, the ECB's governing council left the rate on the bank's main refinancing operations at zero, on its marginal lending facility at 0.25 per cent and on its deposit facility at -0.4 per cent.

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Hinting that the rates could fall still further, the ECB said it would keep them at "their present or lower levels at least through the first half of 2020".

Showing that they have yet tools to boost the economy, the central bankers said they have tasked officials to look at options, including "new net asset purchases".

Carsten Brzeski, analyst at ING said the latest ECB meeting was "preparing the big September bang".

"It now increasingly looks as if the September meeting will not only bring a single measure but rather a package of several measures."

'Rapidly deteriorating outlook'

Expectations for a possible cut at the summer gathering have been heightened in recent weeks by the ECB itself talking up the possibility of action.

In June, ECB president Mario Draghi made clear that "in the absence of improvement... additional stimulus will be required", meaning the institution will not wait for economic conditions to worsen before acting.

While plans for new cuts had been widely expected, markets had not anticipated such a swift return of the massive bond purchase scheme which the ECB only put to an end in December.

"The fact that the ECB is reacting so strongly is due to the rapidly deteriorating economic outlook for the eurozone," said LBBW analyst Jens-Oliver Niklasch.

Surveys have for months pointed to an economic slowdown in the second and third quarters from the 0.4 per cent growth booked in January-March.

Slower growth in turn threatens the central bank's inflation target of just below 2.0 per cent.

Inflation came in at 1.3 per cent in June.

Negative rates are designed to prod the financial system into lending and investing cash in the real economy, rather than parking it safely with the central bank or in government debt.

A step lower in September could help restore confidence in the ECB's room for manoeuvre.

But the Federal Reserves' rate is set to remain in positive territory, while European banks have long grumbled at their negative rate burden, saying it undermines their business model.

Such harm could be softened with a "tiering" system to exempt some deposits from the harshest negative rate, as central banks in Sweden, Switzerland, Denmark and Japan have introduced - something that the ECB is now examining.

AFP