ECB signals a rate cut, more monetary easing ahead

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Mario Draghi, president of the European Central Bank (ECB).

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The European Central Bank (ECB) kept rates unchanged but altered its forward guidance on Thursday amid deteriorating economic data in the euro zone.

Traders are waiting to hear from President Mario Draghi, who is due to speak in about 45 minutes.

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ECB President Mario Draghi warned last month that without a clear improvement for the euro zone economy, the central bank would announce further stimulus measures. This caused market players to up their forecasts for new interest rate cuts or even a bond-buying program. Draghi, speaking in June in Sintra, Portugal, made it clear that his institution was ready to use all necessary measures to revamp the flagging economy.

Data out Wednesday further highlighted the recent weakness, showing German manufacturing PMIs (Purchasing Managers’ Index) falling to 43.1 in July from 45.0 in June. At the same time, new orders in the country dropped at their fastest pace since July 2012, on the back of weakness in Chinese demand and in the auto sector.

The ECB had embarked on a major stimulus package following the sovereign debt crisis of 2011. This included cutting interest rates to record lows, purchasing government bonds and facilitating more lending to euro zone banks. The bank tried to normalize its policy last year — and catch up with other central banks like the U.S. Federal Reserve — but with global trade wars and softness in China most of these banks have now signaled a U-turn. In the U.S., investors now believe there’s an 80% chance that the Fed announces a 25 basis point cut when it meets next week.

At its last meeting in early June, the ECB’s Governing Council revised its interest rate expectations, indicating that its first-post crisis rate hike is unlikely to come before mid-2020.

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