Thursday 10 March 2016 10:53 pm

Euro rebounds: Mario Draghi warns euro inflation will stay negative for "several months" and European Central Bank cuts deposit rate and expands quantitative easing

European Central Bank (ECB) chief Mario Draghi has suggested inflation in the Eurozone will stay negative for "several months" – but added that the bank is "not short of ammunition" to bring it back up to target.

At a press conference after the bank announced it was slashing key rates, Draghi said he expected inflation to pick up to 0.1 per cent in 2016, before rising to 1.3 per cent in 2017, adding that reaching its two per cent target will be a "gradual process". Those forecasts were revised down from one per cent and 1.6 per cent respectively. 

The euro bounced back from previous session lows, rising to $1.1032, 0.3 per cent up, after a sharp fall earlier in the day. 

Draghi also warned rates will "stay at present or lower levels well past the horizon of net asset purchases" – although he later added that he didn't expect it to be "necessary" to cut rates again. 

Earlier, the bank cut its deposit rate to minus 0.4 per cent, from minus 0.5 per cent, as well as expanding its quantitative easing programme by €20bn to €80bn a month – which will run beyond the end of March 2017 "if necessary", Drahi said.

The move means banks keeping their cash with the ECB must pay even more to do so. Negative rates like this are seen as a drastic move by the ECB.

​Equities bounced on the news of the stimulus plan, which bolstered risk appetite, while safe havens like gold dipped. After a lacklustre morning the FTSE 100 jumped into positive territory to trade up 0.1 per cent at 6,154 points after the news, while the Dax rose 1.1 per cent and the Cac rose 1.8 per cent.

“Draghi has fired the big bazooka and given the market what it wanted and more,” said SpreadCo market strategist David Morrison.

“This has taken the market by surprise as we can see from the sharp sell-off in the euro."

"The ECB has come out of the gates drumming big beats and firing on all cylinders," added Naeem Aslam, chief market analyst at Avatrade. 

Although he questioned the bank's decision to include investment-grade corporate bonds in its massive asset-purchase scheme.

"It is a Draghi which we have not seen before and today's decision is very like someone coming up with revenge. The big question is if this is not going to work then we have serious trouble because the ECB is going to buy the corporate bonds." 

Andrew Sentance, a former rate-setter at the Bank of England, summed it up: "Monetary policy is being pushed to the limits… and beyond.”