ECB says stimulus extension to support economy

The ECB gave European markets something to chew over this afternoon when it was announced that its asset buying stimulus package will run for longer than expected but with the monthly budget cut by 20 billion euros after March.

The higher close on Wall Street came on the heels of the European Central Bank’s highly anticipated monetary policy announcement. For example, German Bundes bank holds 18 percent of the total capital at the ECB, Banque de France’s share is 14.2 percent.

The ECB has bought more than €1.4 trillion in bonds, mostly government debt, since March previous year, in a bid to fight off the threat of deflation and kick-start the 19-member currency bloc still held back by the legacy of the 2009 debt crisis. The sharpest yield reaction occurred in short-dated European bonds, which tend to be the most sensitive to central-bank decisions.

United Kingdom stocks have been among the beneficiaries of ECB bond buying, as investors have used proceeds from debt sold to the bank to purchase London-listed equities, among other assets.

For example, now the European Central Bank can not buy bonds with a yield lower than their -0.4% deposit rate, but they are expected to scrap this rule at their meeting on Thursday.

Cosimo Marasciulo of Pioneer Investments detected a split at the ECB: ‘It would appear that the decision to reduce the monthly purchases was not unanimous – Draghi used the phrase “very broad consensus” to describe the decision today.

The European Central Bank is buying bonds at the rate of €80bn a month in a policy which, alongside ultra-low interest rates, is created to help ease the single currency zone out of the economic doldrums. Germany, France and the Netherlands all have elections in 2017, following on from political upsets in the United Kingdom and Italy – as well as the US – this year. The total is more bond buying, despite a slower pace. Euribor money market futures fell as much 8 bps across the 2017-2020 curve as investors moved to price in a slim chance of a rise in euro zone interest rates late next year.

“It didn’t help the euro was at the highs; we had a clearing of euro shorts after the Italian referendum”, said Vassili Serebriakov, FX strategist at Credit Agricole in NY. Inflation ― which has been dangerously low ― is now at its highest in more than two years and rising.

Brent futures were up 18 cent at $53.22 and United States crude inched to $49.95, and Russian Federation announced it had sold a 10.5 billion-euro, 19.5 percent stake in oil giant Rosneft to Qatar and commodities trader Glencore.

The bank raised its forecasts slightly for next year and now expects inflation of 1.3% – still some distance below its 2% target – and growth of 1.7%.

ECB President Mario Draghi signalled policy makers are prepared to boost the program, if needed.

The euro initially spiked to $1.0875 as stops were triggered and the knee-jerk market focused on the 60 bln euros of purchases rather than 80 bln. It left at zero its refinancing rate, at which it lends money to commercial banks, and minus 0.4 percent on deposits it takes from banks.