Markets rally in Europe as European Central Bank says interest rates could fall

Tom Belger
Finance and policy reporter
European Central Bank president Mario Draghi. Photo: Press Association

The European Central Bank (ECB) could lower interest rates as soon as September to boost growth, the bank said in a move that rallied European markets on Thursday.

The central bank kept rates unchanged on Thursday afternoon, but said it could launch new stimulus measures soon as it struck a dovish note amid warning signs over the state of European economies.

The ECB said its key rates could fall or remain the same at least until the first half of 2020, abandoning its previous plans to keep rates at their current level through mid-2020.

Traders appear to believe a rate cut is now in the cards for September, as well as other stimulus proposals like buying up bonds to lift growth and low inflation.

“Draghi delivered except for an actual rate cut,” Jeroen Blokland, senior portfolio manager at Robeco, told Reuters.

The euro dropped to a two-month low against the dollar on the news.

After the announcement, Britain’s FTSE 100 (^FTSE) was up 0.4%, Germany’s DAXX (^GDAXI) was up 0.5%, the STOXX Europe 600 (STOXX) index was up 0.8%, and the STOXX Europe 50 (^STOXX50E) was up 1%.

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British 10-year government bond yields also fell to their lowest level since September 2016.

The bank is under pressure to step in once again to shore up growth in Europe, despite growing concerns about the effectiveness of the monetary stimulus it has regularly embraced since the financial crisis.

Data from Germany released earlier on Thursday showed business morale at its lowest since 2013.

Castern Brzeski, chief economist at ING Germany, called it “the last talk before the ECB will have to walk the walk.”

“As if it wasn't hot enough already in the eurozone today, expectations about today’s ECB meeting also raised the temperature levels,” Brzeski said.

“The ECB refrained from cutting rates or new monetary stimulus but are clearly preparing markets for a rate cut and probably even more at the September meeting.”