ECB decision takes pressure off others, the Federal Reserve

FRANKFURT, Germany— Financial markets groaned at the European Central Bank’s decision to limit its latest round of economic stimulus.

But countries that do a lot of business with the eurozone— such as Switzerland, Britain, and Sweden—are breathing a quiet sigh of relief.

The ECB’s stimulus efforts over the past year have put tremendous pressure on several of its neighbors. Their central banks have had to match the ECB’s moves to lower interest rates in order to keep their currencies from rising against the euro and hurting their exports to the 19-country eurozone, the biggest market in the neighborhood. Currencies tend to weaken when rates are low.

So the ECB’s decision to provide only a small amount of stimulus means central banks in neighboring countries may not have to scramble to catch up with rate cuts of their own.

One of the main steps the ECB took Thursday was to trim its deposit rate from minus 0.20 percent to minus 0.3 percent, less than expected. It also said its bond-buying stimulus program would last for at least an extra six months, to March 2017. It declined, however, to turn up the strength of the stimulus program by increasing the amount of monthly bond purchases.

The response in the markets was feverish. European stocks tanked while the euro surged.

The main reason for the ECB’s decision appeared to be newfound clout among stimulus skeptics on the ECB’s board

based on their concerns about what is good for the eurozone.

But as a side effect it was “about as good as it could have been” for Switzerland’s central bank, analysts at Bank of America wrote.

They said the ECB would likely allow the Swiss National Bank to leave rates unchanged at its next meeting Thursday. The Swiss central bank has struggled to keep its currency, the franc, from surging and hurting exports. It has slashed its key interest rate to minus 0.75 percent.

There was no such pressure after the ECB’s decision and the euro pushed up from 1.08 francs to 1.09 francs.

Switzerland has been struggling mightily this year with the franc’s rise against the euro. In January, when the euro slumped in the day before the ECB announced its 1.1 trillion euro bond-buying stimulus program, the Swiss accepted it was becoming too expensive to intervene in currency markets to keep the franc down. They decided to let it float freely against the euro. The result was a 30 percent jump in the value of the franc that cost companies millions.

Watch maker Swatch blamed the “Swiss franc dilemma” and negative interest rates for a 19 percent drop in its six-month profits. The Swiss watch industry is particularly affected by currency swings since the appeal of their products depends on them being “Made in Switzerland.”

Lafarge-Holcim, a Switzerlandbased construction company with operations around the world, says currency shifts—including the franc’s rise—reduced the value of its sales by 1.4 billion Swiss francs in the first nine months of this year.

Simon Derrick, chief markets strategist at Bank of New York Mellon, says the ECB appears to have caught its smaller peers “off guard” in January and as such it would make sense for it to go “out of its way” to communicate its plans better.

Derrick said the ECB may even have limited the scale of its actions Thursday in the hope that it wouldn’t lead to a repeat of January’s tit-for-tat responses, which effectively created “a mini currency war” in Europe.

ECB President Mario Draghi told reporters Thursday that the impact of ECB policies on other central banks “is a question we ask ourselves all the time,” though he stressed that the eurozone’s monetary authority remains bound by its legal mandate to do what is best for its own economy.

“There is a fairly extensive, I would say, habit of consultation, of discussion— explanation more than consultation, of explanation of the reasons why we do certain things,” he said.

Derrick says it will be interesting to see how the Swiss National Bank reacts at its meeting on Thursday. “Could it be that the board will also feel comfortable enough with the finely calibrated move from the ECB yesterday to leave their own policy unchanged?”

The ECB’s light touch this week also helps clear the way for the globe’s biggest central bank, the U.S. Federal Reserve, as it prepares for a likely rate increase on Dec. 16. Rate hikes could mean a strong dollar, which could hurt U.S. exporters.