“It is a side dish”, said Richard McGuire, London-based head of rates strategy at Rabobank International. By contrast, cutting the so-called deposit rate-what the ECB pays commercial banks that have deposits with it-has dragged short-term rates to near record lows on a more durable basis.
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“The cut in the ECB?s deposit rate from -0.2% to -0.3% comes as a bit of a relief after incorrect last minute reports (by some media) that it had left rates unchanged”, said Jonathan Loynes, chief European economist at Capital Economics.
Michael Hewson, chief market analyst at CMC Markets, cautioned that it’s “highly improbable” that ECB President Mario Draghi will deliver everything that many investors expect it to and cautioned that the outcome of the policy meeting “is more than likely to disappoint”. The Dow slid 0.9%, the Nasdaq fell 0.6% and the S&P 500 tumbled 1.1%. Energy stocks fell along with the price of oil.
– expanded the kinds of bonds it would buy, to include those issued by regional authorities.
“We chose to extend the asset-purchase programme”.
The central bank, led by Mario Draghi, further announced that it would extended its asset purchase programme until March 2017 and at least till a “sustained upward adjustment in inflation” materialises. Disappointed investors had anticipated a 25-percent increase in monthly asset buys, with some even pricing in a bolder deposit rate cut than the move to -0.3 percent from -0.2 percent.
The divergence in monetary policy between the two currencies was highlighted anew on Wednesday when Federal Reserve Chair Janet Yellen hinted at a rate hike later this month.
A cheaper euro makes exports more competitive, while, potentially, stoking something that Europe is screaming out for: inflation. It will either expand its bond purchases or cut interest rates further.
The programme has also rocked bond markets, with the interest rate on the German government’s notoriously stable 10-year bund almost hitting negative territory earlier this year before rebounding sharply.
The euro dropped 0.4pc to $1.0596 yesterday, after sliding 5.5pc since the end of August.
Elsewhere, the Australian dollar slipped 0.3% to $0.7286 after the country posted a larger-than-expected trade deficit. That dragged down U.S. Treasury yields to their lowest in a month on concern the economy, which is still generating little inflation, may not be running as hot as many are hoping. “They want to retain that as long as possible, and they are using the most effective tool to do that: the deposit rate”.
The Fed isn’t one of them.
That’s a sign of weak demand in the economy.
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After a series of dovish signals over the last few weeks, the key question is how, not if, the ECB will ease policy tomorrow; traders are expecting the ECB to be extremely accommodative tomorrow; in fact, pinning down the market’s exact expectations will be critical to the reaction in the euro, European equities, and fixed income in the wake of the announcement.
