FRANKFURT – The latest developments on the day the European Central Bank announced a further stimulus for the 19-country eurozone economy. All times local:
The day’s verdict on the European Central Bank’s latest package of measures to boost the economic recovery across the 19-country eurozone is clear, at least in the markets.
The package announced earlier by ECB President Mario Draghi fell short of expectations and investors were in unforgiving mood. Stocks across Europe tanked, with Germany’s DAX and France’s CAC-40 both closing a hefty 3.6 per cent lower.
The euro reversed course sharply to trade a whopping 2.7 per cent higher at $1.09. Predictions of the euro falling to one-to-one with the dollar have evaporated.
“Draghi has over promised and under delivered,” said Aberdeen Asset Management Investment Manager Patrick O’Donnell.
European stock markets sank while the euro surged after the package of stimulus measures announced by the European Central Bank President Mario Draghi failed to live up to the hype.
Though the ECB made it more expensive for commercial banks to park their cash at the central bank by cutting the so-called deposit rate by 0.1 percentage point to minus 0.3 per cent, many in the markets expected a cut to minus 0.4 per cent. And though the government bond-buying program was extended, the monthly amounts purchased weren’t increased as many had predicted.
“Draghi appears to have over-promised and under-delivered,” said Ben Brettell at stockbrokers Hargreaves Lansdown.
Among the big moves, Germany’s DAX was down 2.2 per cent while the CAC-40 in France fell 1.6 per cent. The euro was perhaps the most notable mover, trading 2 per cent higher at a little more than $1.08. Earlier in the session, it had threatened to drop below $1.05.
The European Central Bank has cut its projections for inflation, a shift that can justify continuing the bank’s stimulus efforts.
The bank cut its forecast for inflation in 2016 to 1.0 per cent from 1.1 per cent in its last outlook in September. It reduced the projection for 2017 to 1.6 per cent from 1.7 per cent in September.
The 2017 revision takes the bank’s projection farther from its goal of just under 2 per cent and helps to justify the bank’s decision Thursday to extend more economic stimulus aimed at raising weak inflation of only 0.1 per cent annually.
Low inflation makes consumers’ paychecks go further, but is also a sign of weak economic growth. Persistent low inflation can make it harder for indebted countries in the 19 country eurozone to adjust.
European Central Bank head Mario Draghi says the bank is extending its stimulus program involving purchases of bonds with newly created money.
Draghi said Thursday that the monthly purchases would continue until March 2017, instead of September 2016. He did not say that the monthly purchases would be increased in size, as some investors had expected.
The ECB purchases government and some extra-safe private-sector bonds as a way of pumping newly printed money into the banking system.
In theory, that increases the amount of credit available to businesses. It also can help the ECB increase the rate of inflation, which is low at 0.1 per cent annually. The bank’s target is just under 2 per cent.
Low inflation is a sign of continuing economic weakness and makes it harder for indebted eurozone countries such as Greece to recover and reduce their debt burdens.
The early reaction in European stock markets to the European Central Bank’s decision to cut a key interest rate has been negative.
Aberdeen Asset Management Investment Manager Patrick O’Donnell said the ECB’s decision to cut the rate on deposits from commercial banks from minus 0.2 per cent to minus 0.3 per cent will “underwhelm” markets. Many had predicting a cut to minus 0.4 per cent.
The negative rate is intended to push banks to lend excess cash by imposing a penalty for leaving it at the central bank’s super-safe deposit facility.
Europe’s main stock markets shed earlier gains. Germany’s DAX was down 0.2 per cent while the CAC-40 in France was flat. And the euro was up 0.6 per cent at $1.0674 following the decision, a clear indication that traders expected a bigger rate cut.
The ECB said it further monetary policy decisions will be announced shortly by President Mario Draghi.
The European Central Bank has announced a cut in one of its key interest rates in an attempt to stimulate lending and help a modest economic recovery.
The bank reduced the rate on deposits from commercial banks from minus 0.2 per cent to minus 0.3 per cent. The negative rate is intended to push banks to lend excess cash by imposing a penalty for leaving it at the central bank’s super-safe deposit facility.
The rate cut is also seen as likely to weigh on the euro’s exchange rate against other currencies. That would help exporters and thus support the modest recovery in the 19 countries that use the euro as their currency.
The ECB also said it will announce further measures at a news conference later by President Mario Draghi.
With investors predicting a bold package of stimulus measures from the European Central Bank later, there is a risk that it fails to meet expectations and that could see the day’s stock market gains evaporate and the euro rise.
Michael Hewson, chief market analyst at CMC Markets, cautioned that it’s “highly improbable” that ECB President Mario Draghi will deliver everything that many investors expect it to and cautioned that the outcome of the policy meeting “is more than likely to disappoint.”
However, Craig Erlam, senior market analyst at OANDA, argues the opposite is the case.
The ECB under Draghi, he said, has a “history of exceeding market expectations when it comes to monetary stimulus and I expect the same to happen again today.”
Investors appear to be expecting bold action from the European Central Bank later in the day.
Stock markets across Europe are markedly higher — Germany’s DAX and France’s CAC-40 are up about 0.9 per cent in late morning trading. The euro is also down 0.5 per cent at $1.0555, a further indication that traders think ECB President Mario Draghi will announce a substantive package of stimulus measures.
Most economists expect the ECB to make it more expensive for commercial banks to park their cash at the central bank — cutting the so-called deposit rate further into negative territory — and to extend and swell its current 1.1 trillion-euro ($1.2 trillion) government bond-buying program.
James Hughes, chief market analyst at GKFX, says Thursday could be “a pivotal day” for the euro and says that parity between Europe’s single currency and the dollar — last seen in late-2002 — is possible soon especially as the Federal Reserve is expected to raise interest rates later this month.
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.
The European Union’s statistics agency says retail sales slipped by 0.1 per cent in October from the previous month. That’s the second straight 0.1 per cent decline and suggests that a rise in consumer demand earlier in the year may have run its course. October’s weakness was largely due to declines in Europe’s top two economies, Germany and France.
On an annual basis, Eurostat said retail sales were 2.5 per cent higher in October, down from September’s rate of 2.9 per cent.
A closely watched survey suggests that the economic recovery across the eurozone is getting stronger but that price gains remain subdued.
Financial information company Markit says its purchasing managers’ index — a broad gauge of activity across the manufacturing and services sector — rose to 54.2 points in November from 53.9 the previous month. Anything above 50 indicates expansion.
Markit says that the rates of expansion in output, new orders and employment all accelerated to be at, or close to, the fastest for 4 1/2 years. It also says backlogs of work suggest that solid growth may continue at the end of the year.
However, the survey shows that the faster growth is not fueling inflation. Low levels of inflation are the primary reason why the ECB is expected to announce new stimulus later Thursday.