The sharp reaction underscored the heavy reliance of financial markets on the deeds and words of central bankers more than seven years after the onset of the global financial crisis. European Central Bank officials had done little in recent weeks to counter those hopes.
Advertisement
The sell-off in the dollar also impacted U.S. Treasuries. The fragile recovery faces additional risks from emerging markets, which are a key source of European export growth.
The ECB wants to raise annual inflation toward its goal of just under 2 percent as part of its legal mandate to maintain price stability.
A separate report from the Commerce Department said factory orders rose slightly more than expected in October, while the Labor Department released a report showing that jobless claims rose in line with estimates in the week ended November 28th. “That reputation [ will have] been badly damaged today”.
Ten-year euro zone government bond yields rose 10-20 basis points, with Italy’s near a one-month high after a 28 bps rise to 1.66 percent.
After moving higher at the open, stocks have turned mostly lower over the course of early trading on Thursday. The Nasdaq composite fell 1.7 percent to 5,037.53.
“A 10 (basis point) cut in the deposit rate initially disappointed markets set up to expect fireworks from the ECB, which was quickly followed by another damp squib of a mere extension of the current ECB QE program”, said Alastair George, Chief Strategist at Edison Investment Research. He also signaled the program could be extended further if necessary.
The ECB announcement then sent the currency tumbling, although it has since rebounded to over US$1.08 on disappointment over stimulus measures.
ECB Board member Jens Weidmann, who also heads Germany’s national central bank, has spoken out recently, saying that existing measures need time to work and that the outlook for the economy was not that bad. The ECB purchases the bonds with newly created money, a step aimed at increasing the amount of money circulating in the economy. But his views carry considerable weight given the Bundesbank’s high level of credibility in Europe’s biggest economy.
The ECB also said it would announce further measures at a news conference later by bank President Mario Draghi.
Analyst Carsten Brzeski at ING-DiBa said stimulus skeptics may have had more clout than expected.
Analysts said Draghi may have encountered pushback from stimulus skeptics on the 25-member governing council.
Draghi said the decisions were not unanimous but that there was a very large majority in favor of the moves.
The ECB launched its program of quantitative easing in March.
The deposit rate is normally the interest banks would receive from parking cash overnight at the ECB.
Despite those efforts, inflation has picked up only modestly. European Central Bank staff now expects consumer prices to rise by 0.1% this year, 1% next, and 1.6% in 2017, having previously projected increases of 0.1%, 1.1% and 1.7%.
The actions clearly fell short of investors’ expectations, causing huge swings in financial markets.
“We chose to extend the asset-purchase program”. So a lot of investors overbought bonds on expectations that Draghi would over-deliver.
“I don’t think our communication was wrong”, he said. “The bonds we have purchased and are purchasing will stay on our balance sheet for a long time”.
The figures, which were weaker than expected, gave a “final green light” to Draghi to both increase the pace of its trillion-euro asset purchases and cut its deposit rate at this month’s policy meeting, according to chief European economist at Capital Economics, Jonathan Loynes.
Although the decisions were more modest than markets had expected, economic advisers to the Berlin government still took a dim view of the double-barrelled shot of policy stimulus.
The programme had been due to end around September 2016.
Advertisement
Paul Hannon and Christopher Whittall contributed to this article. “For Draghi, this is a tactical defeat in a winning strategy”.
