Analysts said Draghi may have encountered pushback from stimulus skeptics on the 25-member governing council.
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Its rate cut of 0.10 percentage point, to -0.30 percent, was smaller than a 0.15 to 0.20 percentage point cut many traders expected. The negative rate is meant to push banks to lend excess cash by imposing a penalty for leaving it at the central bank. This happens when investors’ expectations of a decline in value aren’t met, and they’re forced to quickly buy back the assets they borrowed from their brokers. It had previously been due to run at least through September 2016. Today, eight of the euro zone’s 19 countries, including Spain and Greece, have negative inflation rates.
The ECB wants to boost inflation, but there are warnings that the market reaction may tighten financial conditions and make it even harder to generate.
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. Draghi announced less stimulus measures than the market consensus had expected.
The December 2015 Eurosystem staff macroeconomic projections for the euro area foresees annual real GDP increasing by 1.5 percent in 2015, 1.7 percent in 2016 and 1.9 percent in 2017.
– expanded the kinds of bonds it would buy in its stimulus program, to include those issued by regional authorities.
While analysts mightn’t have gotten what they were expecting in this round, Farley advises investors not to lose hope in the European Central Bank – after all, there’s always January’s meeting.
-extended its offer of unlimited short-term credits to banks through the end of 2017. Investors had to unwind those positions, causing Thursday’s oversized moved in the currency market.
The euro traded 2.4pc higher on the day at $1.0865 by mid-afternoon, on course for its biggest one-day gain since March. Earlier in the day, it had been pushing down towards $1.05 and there were some predictions it was headed toward $1.00 in the coming weeks.
Stock markets were clearly shaken too. Having spent the first half of the trading day higher, European stock markets plunged. The broad Europe Stoxx 600 is off 2.4%, the German DAX is slipping 2.2% and the CAC 40 in Paris is falling 2.6%.
“The ECB should continue to strongly signal its willingness to act and use all the instruments available until its price stability mandate is met”, International Monetary Fund spokesman Gerry Rice said. This is what many traders have been waiting all week for but with the selloff today, things will be that much more interesting. He said the deposit rate cut was “adequate”. “The ECB’s decision to deliver only a very bare minimum of additional monetary stimulus indicates that the hawks at the ECB are stronger than many market participants had thought”, he said. However, Draghi was unable to bring around the hawkish faction led by Jens Weidmann, president of Germany’s Bundesbank, which maintains there is no need for easing because the economy is gradually recovering.
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Low inflation can help spending by consumers by making their euros go farther.
