European Central Bank (ECB) President Mario Draghi on Thursday announced a lowering of the deposit rate into negative territory for the first time in the history of any major central bank.
The decision to cut the deposit rate by 10 basis points to -0.10% was expected by analysts and comes amid concerns over weak inflation, which at 0.5% remains well below the ECB's target of just under 2%.
The ECB also decided to slash interest rates by 10 basis points to 0.15%, slightly less than the 15 basis point drop that was forecast.
The changes will come into effect on June 11th. In an initial reaction the euro/dollar moved lower towards 1.35 but as of 15:27 was trading 0.21% higher at 1.3629.
"The decisions are based on our economic analysis, taking into account the latest macroeconomic projections by Eurosystem staff, and the signals coming from the monetary analysis," Draghi said at a press conference after the policy announcement. "Together, the measures will contribute to a return of inflation rates to levels closer to 2%."
New targeted lending facility put in place: €400bn initially
Another new measure unveiled was targeted longer-term refinancing operations (LTRO) to support lending to households and non-financial corporations, excluding loans to households for house purchase, initially worth €400bn. All LTROs will mature in September 2018.
"Interest rates will stay low for a long period of time, longer than previously foreseen and this will be transmitted to the real economy and that's where LTROs come in," Draghi said.
The ECB sees inflation rising to 0.7% in 2014, 1.1% in 2014 and 1.4% in 2016. In the last quarter of 2016, annual inflation is forecast to be 1.5%.
Preparations being made for outright purchases, if necessary
The Governing Council has also set to intensify preparatory work related to outright purchases in the ABS market to enhance the functioning of the monetary policy transmission mechanism.
The ECB will also continue conducting the MROs as fixed rate tender procedures with full allotment for as long as necessary, and at least until the end of the reserve maintenance period ending in December 2016.
Draghi said the ECB is "not necessarily finished yet" despite the major policy shake-up.
"It's quite clear we are not finished if needed. If such a need were to arise, as we said in the introductory statement, the Governing Council is ready to use unconventional instruments," he said.
Alpari UK analyst Craig Erlam said it seemed the markets approved of the measures with European indices moving higher. He noted that the ECB decided against outright quantitative easing, but Draghi had not ruled it out in future.
"There's been a lot of speculation recently about whether Mario Draghi would bring the bazooka to today's meeting," Erlam said.
"As it turns out, he rolled up in a tank dressed like Rambo armed with everything from guns to grenade launchers. I don't think anyone could have anticipated what was coming today, as Draghi and the ECB opted against choosing between the selection of monetary tools available and instead went for them all."