European Central Bank cuts deposit rate as expected, to announce more measures

The US’ central bank, the Federal Reserve, has now gone a year without having to rely on quantitative easing and could soon even raise interest rates.

“Continuing improvement in the labour market helps strengthen confidence that inflation will move back to our 2% objective over the medium term”.

The idea behind growing the negative rate is to make it more expensive for banks to hoard money and lend it instead.

Earlier the bank cut its deposit rate to -0.3 percent from its existing -0.2 percent, effectively charging banks more for parking cash with the central bank, reversing its earlier guidance that rates had bottomed out.

THE QUOTE: “Ever since the European Central Bank lowered its forecasts in September, followed by President Draghi’s comments in October, there is no doubt that more easing action is necessary to bring inflation up as quickly as possible to close in on the 2 percent target”, said Bernard Aw, market strategist at IG in Singapore. Currently, the euro trades at around $1.06 and some think it could go lower. Yields fall as prices rise.

“This will contribute both to favorable liquidity conditions and to an appropriate monetary policy stance”, Draghi told a news conference, without saying how much that could add to overall purchases now hitting 60 billion euros a month. “The majority on the council will use this to explain the extension of the asset purchase programme”, Schmieding said.

He said France gave up the pretence of fiscal rectitude with successive delays to cutting its deficit while Italy’s 2016 fiscal stance next year is also projected to be 0.7 percent points of GDP looser than seen six months ago.

US non-farm payrolls data on Friday will be keenly watched for more clues.

BOND SHIFT: With ECB interest rates not going as negative as expected, European bond yields jumped.

“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.

Markit said the headline index, seen as a good guide to growth, pointed to a fourth-quarter economic expansion of 0.4 per cent, in line with a Reuters poll.

“The problem the European Central Bank may now face is that the need for stimulus has been so talked up that only something extremely bold will meet market expectations”. He said the deposit rate cut was “adequate”.

The Fed isn’t one of them.

But eurozone QE hasn’t been as effective as in the USA, said Yvan Mamalet, a senior economist at Société Générale.

That’s a sign of weak demand in the economy.

The euro rose dramatically against the dollar to nearly $1.09 – a place it has not been for four weeks. It also says backlogs of work suggest that solid growth may continue at the end of the year. Investors had been betting against the euro ahead of the announcement, expecting that more stimulus would put pressure on the euro.