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The ECB Surprise

Posted by Joseph Trevisani on Sep 4, 2014 4:18:00 PM

The ECB proved it is not out of policy ammunition today by surprising the markets with cuts in its three main interest rates and the start of a program of asset purchases.

The euro fell a figure against the dollar in the first five minutes after the ECB statement at 7:45 am New York time, dropping from 1.3131 to 1.3037 and continuing down more than another 100 points to 1.2920 over the course of the session before a marginal bounce to 1.2949 at the close.  Euro/yen tumbled more than 250 points from 138.01 to end at 136.13.

The European Central Bank cut its main-refinancing rate 0.1 percent to 0.05 percent and lowered both its marginal lending and deposit facility rates 0.1 percent to 0.3 percent and -0.2 percent respectively. The second is the 'negative interest rate' that the ECB hopes will encourage lending by charging banks for keeping excess deposits unused at the central bank.

President Draghi also announced that the bank will begin a purchase program of asset-backed securities (ABS) and covered bonds in an effort to get liquidity flowing through the eurozone economy and financial system. 

The ECB “will purchase a broad portfolio of simple and transparent securities,” Mr. Draghi said today at the press conference in Frankfurt. “Some of our council were in favor of doing more than presented.”  Jens Weidmann, the President of the German central bank opposed the rate cut and the ABS plan, according to a report in Bloomberg. Mr. Weidmann characterized the asset plan as "problematic."

Mr. Draghi had committed the bank last year to support the EMU economy if inflation and economic growth did not improve. 

Euro-area inflation was 0.3 percent last month, well below the ECB’s 2 percent target. GDP was flat in the second quarter as Italy returned to recession, France stagnated and even Germany saw a 0.2 percent contraction. 

The bank also cuts it economic forecasts for the balance of the year and now expects euro-zone GDP to expand by 0.9 percent this year and 1.6 percent in 2015, instead of the prior estimate of 1 percent and 1.7 percent. Inflation is viewed at 0.6 percent this year instead of 0.7 percent. The inflation outlook for 2015 is unchanged at 1.1 percent.


The euro opened at 1.3150 on the value date change yesterday and traded 1.3120-54 before the rate decision. The euro immediately skidded to 1.3036 on the decision at 7:45 am and then to 1.3014. Mr. Draghi specified the asset purchase plan in his news conference which started at 8:30 am, 45 minutes after the rate decision, though it had been reported earlier by Reuters.  

The asset plan, which is to start in October brought the euro to just under 1.3000 but then it rallied to 1.3031 and managed to stay above 1.3000 for about two hours. At 10:30 am renewed selling drove the united currency conclusively through 1.3000 taking it to the day's low at 1.2920 just before the London finished closing at 1.2949.



Chat: Bloomberg

eurecb min



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