ECB surprises by slashing interest rates 5bps, increasing QE by €20bn

The European Central Bank took more action than expected on Thursday to address prolonged low inflation and the global economic slowdown.

Analysts were surprised as the ECB slashed its main interest rate by 5 basis points (bps) to 0.00% and increased quantitative easing (QE) by €20bn.

The monthly purchases under the asset purchase programme will be expanded to €80bn starting in April. The market had priced in a €10bn increase.

The ECB also cut the deposit facility rate by 10bps to -0.40%, but the move was expected.

The decision to lower the marginal lending facility rate to 0.25% from 0.30%, however, was not anticipated.

Another surprise was that investment grade bonds issued by non-bank corporations will be included in the list of assets for regular purchases.

Not long after the announcement, the euro had shot down 1.37% to 1.0846 against the US dollar.

A new series of four targeted longer-term refinancing operations (TLTRO II), each with a maturity of four years, will be launched, starting in June 2016. Borrowing conditions in these operations can be as low as the interest rate on the deposit facility.

"The comprehensive package exceeds expectations by enough to have a positive confidence impact not just on financial markets but also on business confidence in the Eurozone," said Berenberg analyst Holger Schmieding.

"In the absence of any new shock such as Brexit, the package will help to get the Eurozone back to trend growth of annualised rates around 1.6% by mid-2016."

European equities rallied in response to the ECB's action with the DAX rising 2.25%, the CAC 40 increasing 2.58%, the FTSE MIB climbing 3.17% and the IBEX gaining 2.85%.