ECB stimulus surprise sends stock markets sliding
European stock markets have fallen and the euro has soared following the economic stimulus measures announced by the European Central Bank.
After initially rising following the broader than expected package, Frankfurt closed down 2.3%, Paris ended 1.7% lower and the FTSE 100 slid 1.8%.
The euro initially fell 1.6% against the US dollar to $1.0822 before jumping as high as $1.1218.
It was one of the biggest one-day swings in the currency’s history.
Sharp rises for European banks were also largely wiped out.
The ECB cut its main interest rate from 0.05% to 0% and cut its bank deposit rate, from minus 0.3% to minus 0.4%.
The bank will also expand its quantitative easing programme from €60bn to €80bn a month.
Jasper Lawler, of CMC Markets, said: “Stocks came off highs of the day when some of the initial euphoria was nullified by the suggestion by ECB president Mario Draghi that rates would not be cut any further.”
Simon Derrick, chief currency strategist at BNY Mellon: “If the intention of the ECB board was to help weaken the euro then their work was entirely undone by Mr Draghi’s comments about the future path of rates.”
John Hardy, head of currency strategy at Saxo Bank, said: “This was a much bigger bazooka than the market was expecting and shows the ECB trying to get ahead of the confidence curve after learning its lesson in December.”
The stimulus measures announced three months ago have largely failed to drive economic growth higher or boost inflation.
The ECB cut its growth forecasts to an increase of 1.4% this year – down from 1.7%; 1.7% for 2017 – down from 1.9%; and 1.8% for 2018.
The governing council expected the bank’s key interest rates “to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases”.
The bond-buying programme will continue at least until the end of March 2017.
As well as government debt, the bank will now be allowed to use its newly printed money to buy bonds issued by companies as well. That scheme will start towards the end of the second quarter this year.
The market for the European investment-grade corporate bond market is worth about €800bn, according to UBS analysts.
“The devil is in the detail of what will be included in the corporate bond purchases, and right now that presents more questions than answers,” one analyst said.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said the ECB was now “plumbing the depths of monetary policy in a bid to stave off the encroaching threat of sustained deflation in Europe”.
“It’s hard to see even lower rates and more QE in Europe as a positive development. The fact the ECB is still pursuing such extreme monetary policy paints a depressing picture of the European economy, and markets are beginning to question what central banks have left in the locker if the global economy slips back towards recession,” he said.
Experts question whether the central bank’s stimulative plans could harm the euro zone’s fragile banking sector.
Negative rates — effectively charging banks to deposit money — have a significant impact on banks’ profits as they cannot be passed on to consumers. Some analysts believe they amount to a tax on the banking system, compressing their margins, although Draghi said on Thursday that the experience of negative rates in the euro zone had been “very positive.”
Indeed, the Euro Stoxx 600 banking benchmark has fallen sharply in the past 12 months, with the drop most pronounced last month amid concerns over the quality of some lenders’ balance sheets.
“The fear is that by cutting rates further, even with these promises to try and insulate the banks from the effect, you reignite all of these concerns,” Matt King, Global Head of Credit Strategy at Citi told CNBC, prior to the ECB announcement.
He added the risk with a further deposit rate cut was that it could be negative for the market and the banking sector in particular, while an increase in asset purchases would be much more positive. Any reference to the purchase of corporate bonds would be even more positive, he said, but unlikely.
th se are basically the last bullets in the chamber..one day the sheep might wake up and realise how perilous this whole situation is..
negative rates for all..the printing press on full output..rate cutting..theres nothing left they can do..
“The bond-buying programme will continue at least until the end of March 2017. As well as government debt, the bank will now be allowed to use its newly printed money to buy bonds issued by companies as well. That scheme will start towards the end of the second quarter this year.”
wasting good new money on old toxic money..that should work eh?