European Central Bank extends stimulus until March 2017

Even though European Central Bank slashes its deposit rate again, extends timing of asset purchases to March 2017 in efforts to revive growth markets consider steps “unsatisfying”

Photo by: Reuters
Photo by: Reuters

The European Central Bank eased policy further on Thursday to fight stubbornly low inflation but kept much of its powder dry, disappointing high market expectations for greater stimulus.

The ECB cut its deposit rate deeper into negative territory and extended its asset buys by six months, widely anticipated moves that some investors considered the bare minimum after the bank had for weeks stoked expectations of stimulus moves.

The bank will also start buying municipal debt but keep its overall asset purchases unchanged, potentially lowering its government bond buys as the new instrument crowds out other assets.

The euro jumped as much as 3.1 percent against the dollar after the policy announcement and bond yields surged. Disappointed investors had anticipated a 25-percent increase in monthly asset buys, with some even pricing in a bolder deposit rate cut than the move to -0.3 percent from -0.2 percent.

The euro traded 2.4 percent higher on the day at $1.0865, on course for its biggest one-day gain since March.

Defending the moves, ECB President Mario Draghi said the market just needed to take time to understand them, adding they could always be adapted.

"I think these measures need time to be fully appreciated and we'll see," he told a news conference. "Our asset purchase program is flexible, it can always be adjusted."

The huge foreign exchange market move actually tightens monetary conditions, effectively countering the ECB's easing by lowering imported inflation through a higher exchange rate.

"The biggest danger is that market reaction may put the ECB in an awkward position," Nicholas Wall, portfolio manager at Invesco Fixed Income said.

"A large sell-off in bonds and a stronger euro will tighten financial conditions in Europe and make inflation even harder to generate; they may be talking about easing again sooner than they wished,” Wall said.

Still, the euro remains 4 percent weaker against the euro since the last rate meeting, indicating that the easing stance has had some impact, even if much of it has been reversed.

The ECB is also facing seemingly inevitable rate hikes from the US Federal Reserve with divergence between the world's biggest central banks keeping markets volatile.