Incremental Steps

ECB Rate Moves Disappoint

For the first time in a while, Mario Draghi has under-delivered.
  • Why it matters

    Why it matters

    The ECB is at risk of losing its power to persuade financial markets that it has the right prescriptions for pulling the euro-zone economy out of its prolonged slump.

  • Facts


    • The ECB on Thursday left its main bank lending rate unchanged at 0.05 percent but cut its deposit rate by 10 basis points to –0.3 percent.
    • ECB President Mario Draghi also said the bank would extend its bond-buying program until at least March 2017, but stopped short of expanding the monthly pace of its asset purchases.
    • Financial markets reacted negatively, sending stocks lower and the value of the euro up more than 2 percent against the dollar.
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It’s not easy keeping financial markets happy these days. Mario Draghi, the European Central Bank president, is learning that lesson the hard way.

The European Central Bank said it would press ahead with its easy money policy for the 19-nation euro zone on Thursday, keeping its main bank lending rate unchanged but cutting the deposit rate for banks that park excess reserves with the central bank.

In a press conference in Frankfurt, Mr. Draghi said the central bank would extend its massive bond-buying, or quantitative easing, program until at least March 2017 – one year longer than planned. The bank said it will plow back the proceeds from bond that mature into additional bond purchases, and will expand the kinds of bonds it buys beyond federal government debt to regional and local government bonds.

The ECB’s main refinancing rate was left at 0.05 percent, at its historic low since September 2014. The bank cut the deposit rate by 10 basis points to -0.3 percent, meaning banks have to pay a fee to place extra reserve cash at the central bank rather than loan the money out.

Financial markets, however, were underwhelmed by Mr. Draghi’s initiatives, mainly because the ECB stopped short of increasing the monthly pace of its bond purchases from the current rate of €60 billion, or $64 billion.

The euro rose nearly 3 percent against the U.S. dollar following the announcement, trading at $1.0932 at 17:40 Frankfurt time. Major stock indices fell – Germany’s blue-chip DAX Index fell more than 3 percent.

Mr. Draghi’s latest moves are designed to encourage banks to lend money to businesses and individuals, stimulating European economic growth and raising inflation, which stalled at 0.1 percent in the euro zone in November. The ECB has a goal of keeping annual inflation close to 2 percent, and doesn’t expect to reach this target until 2017 at the earliest.

Some economists had called for bolder action from the ECB, warning that markets were increasingly doubting whether the ECB can meet its inflation goals. The more aggressive calls included a cut in the deposit rate by more than 10 basis points, and increasing the monthly pace of its bond-buying program by €20 billion or more.

“I am a bit surprised that the ECB has not done more given the weak inflation expectations. But it’s a difficult game. They do policy based upon what the economy needs, not what markets anticipate,” Andrew Balls, the chief investment officer of bond manager PIMCO, told Handelsblatt.

Markets had priced in an expansion in the monthly bond buys of at least €15 billion, Michael Krautzberger, head of European sovereign bonds at fund manager Blackrock, told Handelsblatt earlier this week.

It marked the first time in a long time that Mr, Draghi has disappointed – rather than positively surprised – the markets with his announcements. But for many economists, it was a sign that markets are expecting too much, rather than a sign that the ECB is reacting too timidly.

The ECB “left many market participants disappointed like small kids who receive less and smaller presents than expected on Christmas eve,” said Carsten Brzeski, the Frankfurt-based chief economist of ING-Diba bank.

The market reaction may play into the hands of Germany’s conservative economic establishment, which opposes the central bank’s strategy of deluging the market with cheap money in an attempt to stimulate lending, and economic growth. Many worry that markets have grown too accustomed to expecting ever-more easing from the ECB.

“The ECB has maneuvered itself into a dead end with its communication policy. Regardless of what it does, it can pretty much only disappoint,” Jan Holthusen, who heads research on rates and bonds for Frankfurt-based DZ Bank, said in a research note.

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