The European Central Bank announced it was cutting its main deposit rate to -0.5% and beginning a massive bond-buying program as part of a sweeping stimulus package.

The 10-basis-point cut brings the deposit rate (the interest banks receive for depositing money with the central bank overnight) to a record low. The 20 billion euros ($21.9 billion) per month of asset purchases would continue as long as necessary, the ECB said.

The ECB also announced it was moving to a two-tier rate system. “In order to support the bank-based transmission of monetary policy, the Governing Council decided to introduce a two-tier system for reserve remuneration, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate,” Draghi said.

The system, pushed by European banks, would give borrowers better rates if their eligible net lending exceeds certain benchmarks.

Germany is on the edge of a technical recession after its economy contracted 0.1% in the second quarter. Economic growth in the eurozone was 0.2% in the quarter, down 50% from the first quarter of the year.

“In view of the weakening economic outlook and the continued prominence of downside risk, governments with fiscal space should act in an effective and timely manner,” ECB president Mario Draghi said in a press conference after the decision.

Draghi is set to leave the central bank in November. The eurozone’s largest economies, Germany and France, opposed the quantitative easing program. Christine Lagarde, who is set to replace Draghi, has advocated more fiscal stimulus.

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One response to “The European Central Bank Cuts Rates, Relaunches Bond Purchases”

  1. With this rate, Euro will have trouble attracting foreign capital and retaining its capital. If my assessment is right, how will they improve the performance of Euro exchange rate?

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