FRANKFURT: The European Central Bank (ECB) stepped up efforts on Thursday (Friday in Manila) to kickstart chronically low inflation in the euro area, cutting a key interest rate and extending its controversial asset purchase program, but financial markets reacted with disappointment.
At the ECB’s last monetary policy meeting of the year, the governing council decided that the key deposit rate would be lowered to minus 0.30 percent.
The deposit rate is normally the interest banks would receive from parking cash overnight at the ECB. But it has been negative since June 2014, meaning banks effectively pay the ECB to hold their funds.
The idea is to encourage banks to lend the money to businesses and households rather than store it at the central bank.
At the same time, the ECB held its other two key rates—the refi and marginal lending rates—unchanged at 0.05 percent and 0.30 percent respectively.
FT tweets wrong decision
The Financial Times caused a flurry on currency markets after erroneously tweeting that the ECB had left all three rates unchanged minutes before the decision was officially announced.
The British newspaper sent out a tweet from Twitter account @FTMarkets at 1238 GMT reading “ECB leaves rates unchanged in shock decision.”
The FT subsequently deleted the old post and apologized for the error, adding that the story was published in error.
At his traditional post-meeting news conference, ECB president Mario Draghi announced that the bank would also beef up its controversial bond purchase program, known as QE or quantitative easing.
The ECB decided to extend the purchases to March 2017 and possibly beyond and to widen the net to include other categories of bonds, Draghi said.
QE is a scheme under which the central bank initially planned to buy up 1.14 trillion euros of bonds at a rate of 60 billion euros per month, at least until September 2016.
The aim, together with lower interest rates and unprecedented amounts of cheap loans made available to banks, was to restart lending and push eurozone inflation back up to levels conducive to healthy economic growth.
But inflation across the eurozone is still doggedly low, standing at just 0.1 percent in November, far below the ECB’s target of just under 2.0 percent.
‘Santa Mario’ disappoints
Draghi, however, insisted that the measures were working and that was why the ECB had decided to step up the QE program.
The ECB was “doing more because it works, not because it fails,” he said.
At the same time, “we had to recalibrate our measures due to changing circumstances over the summer,” Draghi admitted, insisting that the ECB was ready to do it again if the “external conditions put at risk achievement of our objective.”
But financial markets appeared to have expected an even more generous Christmas bonanza.
In Europe, both Frankfurt’s DAX 30 and the CAC 40 in Paris ended the day down 3.58 percent, while London’s FTSE 100 index lost 2.27 percent.
The euro meanwhile recovered from close to an eight-month low, jumping to nearly $1.09 before settling at $1.08 after having struck $1.0551 on Wednesday—the lowest level since mid-April.
“Santa Mario did not turn into the Grinch, the Christmas monster. However, (he) left many market participants disappointed like small kids who receive less and smaller presents than expected on Christmas eve,” said ING DiBa economist Carsten Brzeski.
Failed to meet ‘own hype’
Jonathan Loynes at Capital Economics also said the ECB had “failed to live up to its own hype.”
The reduction in the deposit rate was “disappointingly small,” he said. And the ECB had failed to make up for that with a “decisive” expansion of its asset purchase program, which had been “merely extended . . . from September 2016 to March 2017.”
Analysts also noted that Draghi admitted the bank’s decision was not unanimous, raising speculation that he limited the scope in order to secure a “very large majority” vote.
In Washington, the International Monetary Fund welcomed the new ECB moves but urged it to use its entire toolbox to spur growth.
“The ECB should continue to strongly signal its willingness to act and use all the instruments available until its price stability mandate is met,” IMF spokesman Gerry Rice said.