European Central Bank opens door to interest rate cut

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The European Central Bank has opened the door to a cut in interest rates and the resumption of quantitative easing.

The bank wants to prop up confidence in the eurozone, which has struggled with a manufacturing recession that risks unravelling years of stimulus.

The ECB, which kept interest rates unchanged on Thursday, said it saw rates at present or lower levels until mid-2020.

It also asked staff to look at other easing options.

These include a revamp of its forward guidance on interest rates, a tiered deposit rate and fresh asset purchases.

“The governing council has tasked the relevant eurosystem committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases,” the bank said.

In a news conference, ECB governor Mario Draghi said there was evidence of resilience in the eurozone economy, particularly in services and construction, but “the outlook is getting worse and worse”, especially for manufacturing.

The reasons for this include uncertainty caused by trade tensions and “the possibility of a hard Brexit”. On the inflation front, he said, “We don’t like what we’re seeing.”

Eurozone inflation is stuck well below its 2% target, while industrial production in Germany, the bloc’s biggest economy, is down.

“There is far and wide nothing to be seen of the second-half recovery hoped for in many places,” Commerzbank economist Joerg Kraemer said. “Germany is in a grey area between a marked growth slowdown and a recession.”

But consumer confidence, employment and bank lending remain robust.

The euro fell after the announcement, trading down about 0.31% against the pound at 88.96p.

The ECB has already used up a lot of firepower in stabilising the eurozone economy.

Rates are at record lows and the ECB’s balance sheet is equivalent to 40% of the bloc’s GDP, suggesting that the limits of its stimulus are near.

Mr Draghi will hand over to his successor Christine Lagarde on 31 October.

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