For the European Central Bank, it is the simple things that pack the biggest punch.
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Draghi said at the ECB’s October meeting that the central bank would reexamine its stimulus measures in December, which investors interpreted as a warning that the central bank would expand its stimulus measures.
Inflation in the eurozone, as well as many parts of the world, has been low – sometimes even negative – for more than a year, largely because oil and commodity prices have fallen sharply in financial markets.
“Today’s decisions were taken in order to secure a return of inflation rates towards levels that are below, but close to, 2 percent and thereby to anchor medium-term inflation expectations”, Draghi told reporters at a news conference. But the effect was fleeting, and long-term yields have crept back up.
One indication for that revised outlook is the ECB’s decision to lower its deposit rate by 10 basis points to -0.3 percent.
The ECB purchases government and some extra-safe private-sector bonds as a way of pumping newly printed money into the banking system.
On Thursday, the ECB is expected to announce an expansion of the bank’s EUR60 billion ($63.6 billion) a month quantitative easing, or bond buying, program. Higher interest rates tend to make a currency more attractive to investors.
“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.
The latest interest rate moves are sure to stoke criticism from the opponents of the ECB’s ultra-low monetary policy, led by the two German members on the bank’s rate-setting Governing Council.
France’s CAC 40 rose 0.5 percent to 4,928.18 in early trading and Germany’s DAX was up 0.3 percent at 11,226.84. Hong Kong’s Hang Seng slipped 0.3 percent to 22,417.01 while the Shanghai Composite gained 1.4 percent to 3,584.82. The ECB’s aims to maintain inflation of around 2%.
“This has been a huge failure from the European Central Bank”, said James Hughes, chief market analyst at GKFX.
The reduction in the deposit rate was “disappointingly small”, he said.
The Fed isn’t one of them. USA stocks were set to gain.
A cut in deposit rate was only in-line with expectations, sending stocks into negative territory, and falls accelerated in afternoon trade after ECB President Mario Draghi’s news conference.
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A number of major banks are calling for a weakening of the pound over the next year, given risks to growth and investment from tighter fiscal policy and the prelude to a vote on whether Britain should leave the European Union. Saying that the ECB’s easy monetary policy has been “a success”, Draghi said nonetheless more needs to be done.
