ECB stimulus boost, rate cut prove weak
QUANTITAVE EASING IS NOW INTENDED TO RUN UNTIL MARCH 2017
The European Central Bank cut a key interest rate and extended its stimulus programme to bolster the 19-country Eurozone economy — but the actions underwhelmed investors, who pushed stocks sharply lower.
The main move by the ECB was to cut the interest rate on deposits from commercial banks from minus 0.2 per cent to minus 0.3 per cent.
That is intended to push banks to lend by imposing a penalty on the cash they park at the central bank. Many in the markets, however, had predicted a bigger cut to minus 0.4 per cent.
And alongside other measures, ECB President Mario Draghi said the bank will extend the duration of its bondbuying programme, which aims to make borrowing cheap in the wider economy.
Draghi said the quantitave easing (QE) programme, which was due to run at least through September 2016, is now intended to run until March 2017 or beyond if necessary. Though the programme has been extended, which will increase the size of the overall stimulus from the previous €1.1 trillion (Dh4.25 trillion, $1.2 trillion), the monthly cap of €60 billion in purchases was maintained.
“Today’s decisions were taken in order to secure a return of inflation rates towards levels that are below, but close to, 2 per cent and thereby to anchor medium-term inflation expectations,” Draghi told reporters at a news conference.
The ECB, the chief monetary authority for the countries that use the shared euro currency, also:
Expanded the kinds of
■ bonds it would buy, to include those issued by regional authorities.
Would reinvest principal
■ payments on the bonds it has bought. This is an important step that means the eventual maturing of the bonds will not reduce the level of monetary stimulus over coming months and years.
Extended its offer of unlimited
■ short-term credits to banks through the end of 2017.
The actions were not enough however to satisfy markets, which expected significantly more.
In frenzied trading, the euro jumped 2.4 per cent to $1.0861 after the ECB announcements. Earlier in the day, it had been pushing down towards $1.05 and there were some predictions that it was headed toward $1.00 in the coming weeks.
In stock markets, the moves were equally sharp. Having spent most of the day higher, European stock markets plunged. Germany’s DAX was down a whopping 3 per cent while the CAC-40 in France slid 2.6 per cent. “This has been a huge failure from the ECB,” said James Hughes, chief market analyst at GKFX. “Much more was expected.”
Draghi said the decisions were not unanimous but that there was a very large majority in favour of the moves. He said the deposit rate cut was “adequate”. “I don’t think our communication was wrong,” he said. “I think these measures need time to be fully appreciated.”
The ECB wants to raise annual inflation toward its goal of just under 2 per cent as part of its legal mandate to maintain price stability.
The euro jumped more than 1 per cent against the dollar yesterday, rebounding from a 7-1/2-month low, after the European Central Bank cut its interest rate on deposits by just 10 basis points, disappointing some expectations of a sharper move.
In a volatile few minutes around the decision, the euro rose sharply on a report by the Financial Times, later corrected, that the bank had not moved interest rates at all.
After the decision to cut was announced, it surged to as high as $1.0742, its highest in a week.
“They cut on the low end of expectations, so there’s some euro short-covering and probably some euro buying from neutrals,” said Stephen Gallo, currency strategist at Canadian bank BMO in London.
“Now that they’ve cut less than expected, I think they’ll shy away from an aggressive sovereign QE add,” he said. “Maybe they want to lay off the euro a little bit — that’s my initial reaction.” The divergence in monetary policy between the euro and dollar was highlighted anew on Wednesday, when US Federal Reserve Chair Janet Yellen hinted at a rate hike later this month, saying she was “looking forward” to lift-off.
Yellen’s hawkish comments sent the greenback soaring to a 12-1/2-year high against a basket of six major peers, while the single currency slipped to $1.0550, its lowest level since mid-April.
Morgan Stanley’s European head of G10 FX strategy in London, Ian Stannard, said earlier yesterday that it would be tricky for Draghi to drive the single currency down straight away. It has already fallen over 7 per cent since the ECB’s last meeting.
“We’ve seen time and time again that Draghi has been able to surprise the market, and if he’s able to do that today then yes, I think the euro can continue to go lower,” Stannard said. Data released on Wednesday showing US private employers added a larger-than-expected 217,000 jobs in November bode well for Friday’s nonfarm payrolls data, easing concerns sparked by a soft US manufacturing data on Tuesday, and further boosting the dollar.
Now that they’ve cut less than expected, I think they’ll shy away from an aggressive sovereign QE add. Maybe they want to lay off the euro a little bit.”
Stephen Gallo | Currency strategist at BMO