The European Central Bank chief may have underwhelmed investors in December but bounced back on Thursday by unveiling an aggressive package of easing measures that triggered a big market rally.
Advertisement
The ECB’s plan to buy corporate bonds is a radical departure for a central bank that was far more conservative than its peers during the financial crisis.
Markets initially cheered the package but reversed course after Draghi hinted the ECB was done cutting rates and ruled out a tiered deposit rate structure – a system of multiple rates already used in Switzerland and Japan to encourage lending to companies while also punishing banks that hold too much cash.
Anticipation of the decision has sent the euro lower, and just after 11:30 a.m GMT (6:30 a.m ET) the euro is down against both the dollar and the pound. Euro zone bank shares are still down 15 percent on the year but they are 20 percent above February lows, suggesting market sentiment has stabilized. The Bank for International Settlements, an international organization of central banks, said in a report Sunday that central bank policies were reaching their limit.
The ECB said it would also expand the volume of bonds it purchases each month under its programme of quantitative easing to 80 billion euros from 60 billion euros.
Laith Khalaf, senior analyst at stockbrokers Hargreaves Lansdown, says it’s hard to see how even lower interest rates and an increase in the bond-buying program can been seen as a positive development. Inflation has been below the ECB’s almost 2 percent target for three years and is likely to remain so for many more.
“From today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further”.
In a press conference following the policy announcement, Draghi said the Governing Council cut its March 2016 estimates for inflation this year to 0.1%, compared to last December’s expectation of 1%, reflecting falling oil prices over recent months.
The pound was little changed against the dollar, with GBP/USD at 1.4219, holding above the seven-year trough of 1.3835 hit late last month.
He said the fact the ECB is “still pursuing such extreme monetary policy paints a depressing picture of the European economy”.
The rate on its marginal lending facility is going down to 0.25 per cent from 0.30 per cent and on the deposit facility to minus 0.40 per cent from minus 0.30 per cent. It will also start purchasing investment-grade, euro-denominated, non-bank corporate bonds.
Advertisement
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move.
