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ECB pulls out all the stops, cuts rates and expands QE


The European Central Bank (ECB) has delivered a surprise package of measures designed to kickstart Europe's moribund economy by cutting all of its main interest rates and expanding its massive bond-buying program.

The bank announced Thursday that it had cut its main refinancing rate to 0.0 percent and its deposit rate to minus-0.4 percent.

It also extended its monthly asset purchases to 80 billion euros ($87 billion), to take effect in April. Investment grade euro-denominated bonds issued by non-bank corporations will now be eligible for purchase. On top of that, the ECB will now include corporate bonds to the assets it can buy.

Starting in June, the bank will also launch a series of four targeted longer-term refinancing operations with maturities of four years.

At his regular media conference on Thursday, Draghi said that the set of measures would "exploit the synergies between the different instruments and … reinforce the momentum of the euro zone's economic recovery."

The euro fell by 1.2 percent to a one-week low of $1.086 after the announcement, while European stock indexes rose.

The ECB went against tradition in presenting measures other than rate changes in its written statement.

"It will be interesting to see how Draghi will address recent criticism on the effects of the ECB's monetary policy and whether he can give the markets the feeling that the ECB indeed is almighty and powerful and not impotent," ING Chief Economist Carsten Brzeski said in a note on Thursday.

Negative rates: Good or bad?

Experts question whether the central bank's stimulative plans could harm the euro zone's fragile banking sector.

Negative rates — effectively charging banks to deposit money — have a significant impact on banks' profits as they cannot be passed on to consumers. Some analysts believe they amount to a tax on the banking system, compressing their margins.

Indeed, the Euro Stoxx 600 banking benchmark has fallen sharply in the past 12 months, with the drop most pronounced last month amid concerns over the quality of some lenders' balance sheets.

"The fear is that by cutting rates further, even with these promises to try and insulate the banks from the effect, you reignite all of these concerns," Matt King, Global Head of Credit Strategy at Citi told CNBC, prior to the ECB announcement.

He added the risk with a further deposit rate cut was that it could be negative for the market and the banking sector in particular, while an increase in asset purchases would be much more positive. Any reference to the purchase of corporate bonds would be even more positive, he said, but unlikely.

Murray Roos, Global Head of Sales for Equities and Prime Finance at Citi told CNBC said further measures would likely strengthen the equity market, but warned that the returns could be diminishing.

"In order for equity markets to sustainably move higher, one would expect, or need there to be earnings growth, And earnings growth we haven't necessarily come see through to a great extent."

Geopolitical as well as macroeconomic factors that conspired to make for a very volatile start to the year in equity markets were stabilizing somewhat, Roos said. Decisive action today could further reduce the uncertainty and volatility, he added.

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