ECB cuts deposit rate, extends QE

The governing council of the ECB has decided to cut the interest rate on the deposit facility by 10 basis points to -0.30%, president Mario Draghi (pictured) said during the press conference.

The measure will take effect from 9 December 2015.

The interest rate on the main refinancing operations and the interest rate on the marginal lending facility will instead remain unchanged at 0.05% and 0.30% respectively.

As a further measure to boost inflation and encourage household and firms to spend, the ECB has also extended its QE programme.

Previously due to run until September 2016, Draghi said the governing council has now decided that the programme will run until March 2017, or beyond if necessary.

However, Draghi did not mention any increase in the monthly asset purchase of €60bn nor has he hinted at the possibility of buying riskier assets than government bonds.

Some economists and managers sounded disappointed at the news.

Neil Williams, Group Chief Economist, at Hermes Investment Management, said: “He [Draghi] hasn’t quite pushed out the ‘boat on QE2’! By extending it six months to March 2017, and including regional and local debt, his sign of intent is he will do more.

“But, by not upping the pace, at just €60bn purchases per month, and excluding other assets such as more corporate bonds and mortgage debt, he is keeping some powder dry.”

Nicholas Wall, portfolio manager, Invesco Fixed Income team: “This was a major disappointment versus the market’s expectations. All the speeches, interviews and the ECB forum at Sintra had led the market to believe that they had serious concerns about the negative impact of consistently low inflation prints on trend growth and inflation expectations – but this fear seems to have subsided somewhat.

“President Draghi had been also worrying about the correlation between oil and inflation expectations and commented that this correlation has fallen – but we believe this correlation has fallen largely because the market believed that the ECB was getting serious about its mandate.”

However, Draghi’s announcements have been hailed positively by David Zahn, head of European Fixed Income, Franklin Templeton Investments: “The measures announced today by the ECB, although a little underwhelming, are what the market needed and are in line with what we expected.

“In our view, extending the QE programme is absolutely the right tool to aid recovery in the Eurozone, evidenced by the progress already made since the programme began earlier in the year. As a result, European bond yields should remain well-anchored, and we are likely to see European bonds outperform US bonds as monetary policies continue to diverge.”

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