The main reason for the decision, as Draghi had hinted before, was that the central bank’s own inflation forecast had to be revised down again, illustrating the difficulty it has in meeting its official target.
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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. Predictions of the euro falling to one-to-one with the dollar have evaporated.
“What has been delivered is way short of market expectations”, said Mr Alvin Tan, a London-based strategist at Societe Generale.
Stock market moves were equally sharp.
Zafgen (ZFGN.O) shares were down 5.1 percent at $5.96 after the company said the U.S. Food and Drug Administration was putting on complete hold a late-stage study testing its experimental obesity drug. Earlier in the session, it had threatened to drop below $1.05.
That is meant to push banks to lend by imposing a penalty on the cash they park at the central bank.
The ECB is extending its programme of so-called quantitative easing or QE from the initial deadline of September 2016 until March 2017 and possibly beyond. He said that the stimulus will run to the end of March 2017 or beyond, until there is sustained adjustment in the path of inflation consistent with achieving close to 2 percent over the medium term.
As well as lowering the deposit rate, the European Central Bank also extended QE for a further six months. And Draghi has shown all too vividly that the hints of central bankers – even the biggest hints – should be treated with some caution.
“You’ve got a Federal Reserve set to tighten and some investors had taken solace in the ECB being the new leader in easy money”, said Jack Ablin, chief investment officer at BMO Private Bank.
– expanded the kinds of bonds it would buy in its stimulus program, to include those issued by regional authorities. “The cut we decided today is adequate”. The economy has “recovered substantially since the Great Recession”, Yellen said in prepared remarks to U.S. Congress on Thursday. The DAX 30 and the CAC 40 in Paris ended the day down 3.58%.
The expected difference between interest rates in two countries or monetary unions is a key determinant of their exchange rate: if investors think they can gain higher returns in one country they will invest in it, boosting its currency. “The result is a policy race to the bottom that spreads deflation inside and outside the euro area”, economists at Soros Fund Management said in a note published on November 1.
While he announced that the ECB’s asset purchase programme would be extended, he did not increase the size of the programme, and bets that there might be further easing were dashed. Wall Street’s benchmark S&P 500 stock index had its biggest one-day percentage decline since September 28, also in reaction to the European monetary policy move.
However, Craig Erlam, senior market analyst at OANDA, argues the opposite is the case.
The euro’s rebound also helped to lift other currencies against the dollar, with European currencies outperforming.
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Official figures show that retail sales across the eurozone remain sluggish despite the boon offered to consumers by cheap oil and subdued consumer price gains.
