FRANKFURT — The European Central Bank took unexpectedly aggressive steps on Thursday to head off a downturn before it gained momentum, but the bank signaled that it was reaching the limits of what it could do to stimulate the eurozone economy.
The central bank cut a key interest rate and revived a money-printing program, but later issued an unusually strong call for eurozone governments to do more of the economic heavy lifting.
Those countries that can afford it should stimulate growth by increasing public spending, Mario Draghi, the central bank president, said during a news conference.
Asked whether the message to political leaders was that they can’t expect the central bank to come to their rescue forever, Mr. Draghi answered: “Definitely yes.”
Mr. Draghi’s call for government action, which he said had the unanimous support of the bank’s 25-member Governing Council, was also an expression of unity with his soon-to-be-successor, Christine Lagarde. Ms. Lagarde, who will become the European Central Bank’s president in November, issued a similar plea when she spoke to members of the European Parliament last week.
For much of the last decade, the European Central Bank has prevented the eurozone economy from collapsing with an array of sometimes unprecedented crisis measures. But economic growth has almost stalled, and there is a growing consensus among analysts that wealthier countries like Germany or the Netherlands need to pump money into their economies, and by extension the rest of the eurozone, with tax cuts or public works projects.
Central banks are “not the only game in town,” Ms. Lagarde said at the European Parliament last week.
Read more: Central banks around the world are cutting rates to fend off recession.
The measures that the European Central Bank announced Thursday go beyond what many analysts were expecting. Recent comments by members of the Governing Council had cast doubt on whether the bank would restart purchases of government and corporate bonds. It has been only nine months since the bank ended a previous bond-buying program, an initiative that started in the midst of the financial crisis.
The bank will buy 20 billion euros’ worth of bonds, or $22 billion, every month starting in November, a form of money printing intended to inject money into the system and hold down interest rates.
In a bid to increase lending, the bank also pushed even lower the so-called negative interest rate it imposes on commercial banks that hoard cash.
In normal times, banks earn interest when they deposit money in central banks. But since 2014, the European Central Bank has imposed a negative rate — essentially, a charge — on such deposits to pressure commercial banks to lend more. On Thursday, the central bank changed this deposit rate to minus 0.5 percent from minus 0.4 percent. It was the first cut in interest rates since 2016.
The deposit rate is one of the few remaining levers the bank can use to push down market interest rates. Its benchmark interest rate, the rate at which it lends to banks, is already at zero and cannot go any lower.
The move was symptomatic of the upside-down world of modern finance, in which interest rates are so low that insurance companies and other investors must pay governments and even some corporations to keep their money safe.
The central bank acknowledged Thursday that negative interest rates have some unwanted side effects and took steps to ease the pain. Some bank holdings will be exempt from the penalty, a practice known as tiering.
Despite Mr. Draghi’s plea for governments to do more, the idea of debt-financed spending, even on such favorable terms, is politically touchy in Germany. Germans are proud of their balanced budgets, and a constitutional amendment effectively forbids deficit spending.
Mario Draghi, the European Central Bank president, at a news conference after the meeting of the Governing Council in Frankfurt on Thursday.CreditRalph Orlowski/Reuters
With Germany on the brink of recession, weighed down by slumping exports caused by the United States-China trade war, some domestic leaders have begun to question that orthodoxy. “We should think about whether a break-even budget is the right path,” Wolfgang Tiefensee, economics minister of the state of Thuringia, said in an interview last month.
“We should use increased tax receipts to invest in infrastructure — bridges, streets, railways, broadband,” he said, “everywhere there is an urgent need to catch up.”
“Many people share this view,” Mr. Tiefensee added, “but not yet a majority.”
The European Central Bank also exceeded expectations by making an open-ended commitment to keep interest rates low, and sweetening a program that encourages banks to lend money to consumers and businesses.
The bank said it would not begin raising interest rates “until it has seen the inflation outlook robustly converge to a level” below but close to 2 percent, the official target. The annual rate of inflation in August was only half that much. The open-ended commitment was in contrast to previous statements when the bank outlined a specific time frame.
Further, the bank said it would ease the terms of a program that allows banks to borrow money on favorable terms, provided they lend it to customers. The loans will be extended to three years from two, and for banks that meet certain benchmarks the interest rate will be negative. In other words, banks won’t pay any interest and won’t have to repay all of the money they borrowed.
President Trump, who has been pressing the Federal Reserve to cut its benchmark rate, responded to Thursday’s move by needling his own central bank. The European bank, he said, is “trying, and succeeding, in depreciating the Euro against the VERY strong dollar, hurting U.S. exports … And the Fed sits, and sits, and sits.”
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The euro slipped against the dollar on Thursday, but Mr. Draghi rejected the idea that currency manipulation was behind the bank’s action.
“We have a mandate, we pursue price stability, and we don’t target exchange rates, period,” he said.
Some prominent economists say that it’s time for the European Central Bank to get more creative. The bank’s balance sheet already includes €2.6 trillion, or about $2.9 trillion, in government and corporate bonds. They were bought with newly created euros to inject money into the financial system and push down interest rates.
Analysts say that the bank has limited scope to buy more government bonds because it already owns such a big chunk of the market.
“As I see it, he has only about €60 billion of sovereigns he can buy,” Carl Weinberg, chief international economist at High Frequency Economics in White Plains, N.Y., said in an email. “That does not support sovereign bond purchases lasting for very long.”
Some economists have begun urging the bank to consider printing money and distributing it directly to citizens.
Among them is Stanley Fischer, former vice chairman of the Fed and Mr. Draghi’s thesis adviser when he was a doctoral student at M.I.T. Mr. Fischer was among the authors of a report published last month by the fund manager BlackRock.
“An unprecedented response is needed when monetary policy is exhausted and fiscal policy alone is not enough,” the report said.
“That response will likely involve ‘going direct,’” the report said. “Going direct means the central bank finding ways to get central bank money directly in the hands of public and private sector spenders.”
The eurozone economy probably needs to get a lot worse before the central bank would consider such an idea, which would be highly contentious. “Giving money to people in whatever form, it’s a fiscal policy task,” Mr. Draghi said Thursday. “It’s not a monetary policy task.”
He added, though, that Ms. Lagarde might reconsider the issue.
Mr. Draghi will preside over one more monetary policy meeting, on Oct. 24, before handing power to Ms. Lagarde.
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