ECB Cuts Deposit Rate

Market Trends - 03/12/2015

As was widely expected by analysts and market participants, the European Central Bank opted to leave the key interest rate unchanged at 0.05% while moving the deposit rate 10 basis points lower to -0.30%. The kneejerk reaction in the EURUSD pair was substantial considering the absence of an announcement on expanded quantitative easing measures, moving over 200 pips off of intraday lows before retreating modestly and thereafter resuming the uptrend during the press conference. In a growing sign that the Central Bank is having difficulty meetings its price stability and inflation mandates, the expansion of accommodative measures is intended to rejuvenate spending to drive inflation higher after the latest disappointing preliminary CPI results released just yesterday from the Euro Area. However, cutting the deposit rate was just the first part of the measures announced with the objective of restoring growth and improving conditions for businesses and individuals across the economic region.

Other measures announced by the ECB include the extension of the asset purchase program to the end of March 2017 and beyond if deemed necessary by the Governing Council. Other measures included plans to reinvest principal payments as assets on the balance sheet mature in an effort to contribute to favorable liquidity conditions. Finally, aside from the expansion of duration of the program, President Mario Draghi also announced the addition of other assets to list of applicable, marketable debt instruments the Central Bank can buy including municipal debt issued by regional and local governments. Nevertheless, in his comments on the current state of the economy, Draghi highlighted the sluggish pace of implementation of structural reforms still weighing on the outlook for the region. Despite the surge in the Euro and upgrade of growth forecasts for 2015, these downside risks will continue to pressure the common currency lower over the medium-term as the Central Bank works to meet its inflation target.




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