European shares fall after ECB rate cut disappoints

The policy changes announced, including a further cut in the central bank’s deposit rate and an extension of its bond- buying program, were less forceful than many investors had expected.

The ECB also said that president Mario Draghi would announce “further monetary policy measures” at his traditional post-meeting news conference.

Analysts polled by Reuters last week had expected the European Central Bank to increase the monthly purchases to 75 billion euros as well as extending the purchases. In a preliminary estimate on Wednesday, the Eurozone consumer price index held at 0.1% growth year-on-year in November, missing forecasts of 0.2%. It stood at 0.75 percent in July 2011, was gradually lowered by the European Central Bank from November that year, and became negative for the first time in June 2014. It reduced the projection for 2017 to 1.6 percent from 1.7 percent in September. And the euro was up 0.6 percent at $1.0674 following the decision, a clear indication that traders expected a bigger rate cut.

The euro immediately fell to a low for the day after the diappointing data, dropping 0.42 percent against the USA dollar to US$1.0588 in London trade.

European stocks have risen to their highest level in around three months, largely owing to the prospect of new stimulus measures when the ECB meets on Thursday.

The rate cut was not as much as some traders had been expecting and it came with some confusion thrown in for good measure.

The market’s reactions “reflects the positioning [of investors]”.

“I do not think Janet Yellen is going to disappoint the market”, Singh said, adding that a Fed rate hike will reverse any gains that the euro is making versus the U.S. dollar, thanks to today’s news.

Chief strategist at Edison Investment Research, Alastair George, described the ECB’s actions as a “damp squib” for markets that were “set up to expect fireworks”. This went to 0.9 percent from 1.1 percent a month earlier.

“The ECB is acting against a backdrop of easier fiscal policy; across the euro zone, governments are quietly abandoning fiscal austerity”, David Tan, Global Head of Rates at J.P. Morgan Asset Management said. Anything above 50 indicates expansion. It also says backlogs of work suggest that solid growth may continue at the end of the year.

The huge foreign exchange market move actually tightens monetary conditions, effectively countering the ECB’s easing by lowering imported inflation through a higher exchange rate.