ECB expands stimulus, but not as much as expected

The European Central Bank cut a key interest rate and extended its stimulus program to bolster the 19-country eurozone economy — but the actions underwhelmed investors, who pushed stocks sharply lower.

The main move by the ECB was to cut the interest rate on deposits from commercial banks from minus 0.2 percent to minus 0.3 percent.

That is intended to push banks to lend by imposing a penalty on the cash they park at the central bank. Many in the markets, however, had predicted a bigger cut to minus 0.4 percent.

And alongside other measures, ECB President Mario Draghi said the bank will extend the duration of its bond-buying program, which aims to make borrowing cheaper for businesses and consumers.


The program, which was due to run at least through September 2016, is now intended to run until March 2017 or beyond if necessary. Because the monthly cap of 60 billion euros in bond purchases was maintained, that will increase the overall size of the 1.1 trillion euro ($1.2 trillion) program by 360 billion euros.

“Today’s decisions were taken in order to secure a return of inflation rates towards levels that are below, but close to, 2 percent and thereby to anchor medium-term inflation expectations,” Draghi told reporters at a news conference.

The ECB, the chief monetary authority for the countries that use the shared euro currency, also:

— expanded the kinds of bonds it would buy, to include those issued by regional authorities.


— said it would re-invest principal payments on the bonds it has bought. This is an important step that means the eventual maturing of the bonds will not reduce the level of monetary stimulus over coming months and years.

—extended its offer of unlimited short-term credits to banks through the end of 2017.

The actions were not enough, however, to satisfy markets, which had expected significantly more.

In frenzied trading, the euro jumped 2.4 percent to $1.0861 after the ECB announcements. Earlier in the day, it had been pushing down towards $1.05 and there were some predictions it was headed toward $1.00 in the coming weeks.

In stock markets, the moves were equally sharp. Having spent most of the day higher, European stock markets plunged. Germany’s DAX was down a whopping 3 percent while the CAC-40 in France slid 2.6 percent.

“This has been a huge failure from the ECB,” said James Hughes, chief market analyst at GKFX. “Much more was expected.”

Draghi said the decisions were not unanimous but that there was a very large majority in favor of the moves. He said the deposit rate cut was “adequate.”

“I don’t think our communication was wrong,” he said. “I think these measures need time to be fully appreciated.”


Analyst Carsten Brzeski at ING-DiBa said stimulus skeptics may have had more clout than expected during Thursday’s meeting of the 25-member governing council. “The ECB’s decision to deliver only a very bare minimum of additional monetary stimulus indicates that the hawks at the ECB are stronger than many market participants had thought,” he said.

ECB Board member Jens Weidmann, who also heads Germany’s national central bank, has spoken out recently, saying that existing measures need time to work and that the outlook for the economy was not that bad.

The ECB wants to raise annual inflation toward its goal of just under 2 percent as part of its legal mandate to maintain price stability.

Draghi said there are “continued downside risks” to the inflation outlook. The ECB trimmed its forecasts for inflation next year, to 1 percent from 1.1 percent previously, and for 2017 to 1.6 percent from 1.7 percent.

“The persistence of low inflation rates reflects sizeable economic slack weighing on domestic price pressures and headwinds from the external environment,” Draghi said.

Low inflation can help consumers by making their euros go farther. But it is a sign of weak demand, and can lead to chronic stagnation if people begin anticipating flat or falling prices in purchasing decisions and wage agreements.

Weak inflation of the sort prevalent in the eurozone makes it harder for the currency union’s indebted members, such as Greece, to reduce their burdens and to bring their business costs down relative to their eurozone trade partners — a necessary step in their economy recovery.

The eurozone economy as a whole grew by a moderate 0.3 percent in the third quarter, while unemployment is falling but only gradually from high levels.


Draghi said the economic recovery should proceed but that it “continues to be dampened by subdued growth prospects in emerging markets and moderate global trade, the necessary balance sheet adjustments in a number of sectors and the sluggish pace of implementation of structural reforms.”

The ECB’s current policy path contrasts with that of the U.S. Federal Reserve, which has ended its own bond purchase program and is expected to start raising interest rates from near zero at its next meeting Dec. 16.