The Eurozone is continuing to experience weak growth, low inflation and high unemployment. This cocktail of economic woes led investors to believe that the European Central Bank would step in with decisive, new measures aimed at boosting Eurozone economic activity. The speculation was that a cut in interest rates was possible, but they are already virtually at zero, and that further quantitative easing was in the offing. It was imagined that the quantitative easing could be extended to other asset groups and that the absolute amount of asset purchases would be increased, but in the end, these expectations were dashed.
What the ECB president, Mario Draghi, did deliver was a further “reduction” in what the bank paid to financial institutions for leaving their funds with the ECB. The overnight deposit rate was reduced from -0.2% to -0.3%, meaning that the costs to commercial banks for parking money with the ECB have risen. The idea behind this move is that it ought to prompt the commercial banks to lend money to businesses and private individuals since the ECB’s move makes this slightly more appealing. On the QE front, the ECB confirmed that the programme would now run until March 2017, at least – the programme was originally slated to run until “at least” September 2016, so this is hardly earth-shattering news.
Reaction to the move was for all of the major European stock markets to fall sharply; they started to regain some ground today, but by mid-morning (at the time of writing) were again lower by almost half a percent. On the Forex markets, a stronger reaction was seen with the Euro making strong gains against other major currencies (it rose by four Yen at one stage yesterday). The reason for this was that the Forex markets had been pricing a more Bullish monetary approach into the Euro price over the last few weeks. In the end, this was overdone, hence the bounce in the Euro’s value.