5th Jun 2014 14:12
LONDON (Alliance News) - European stocks have risen, while the euro has lost further ground, after the European Central Bank on Thursday became the first major official lender to introduce negative interest rates, a move it unveiled along with a raft of other measures aimed at boosting economic growth and preventing deflation in the eurozone.
The euro fell to a four-month low against the dollar, while gold spiked 1%.
UK stocks got a short-lived boost from the announcements, but by mid-afternoon were back in the red. The FTSE 100 is down 0.2% at 6,807.90, and the FTSE 250 is down 0.1% at 15,976.55, while the AIM All-share continues to underperform. Dragged lower by internet-retailer ASOS, which made a profit warning Thursday, the AIM All-share is down 1.8%.
Major European markets, where the effects of the ECB's policy changes will be more directly felt, have had a much more positive reaction. The German DAX breached 10,000 points for the first time ever and continues to trade up 0.5% at 9,977.55, while the French CAC 40 up 1.3% at 4,565.40.
In the US, where futures markets have been in the red for most of the day, ahead of the ECB announcement, stocks have just opened higher, with the DJIA and the S&P 500 both up about 0.2%.
All three of the rates that make up the ECB's primary policy tools were revised lower. The benchmark refinancing rate was cut to 0.15% from 0.25%, while the deposit rate was cut from zero to minus 0.1%, and the marginal lending rate, at which banks can borrow overnight funds from the central bank, was cut to 0.4% from 0.75%. The new rates will take effect from June 11.
"We are reacting to a risk of a too prolonged period of low inflation," said ECB President Mario Draghi at the press conference at which he unveiled the full package of measures.
That package included pretty much everything that was speculated about in the run up to the announcement, stopping just short of the introduction of full quantitative easing - although that was strongly hinted at as an option going forward.
"There?s been a lot of speculation recently about whether Mario Draghi would bring the bazooka to today?s meeting," said Alpari market analyst Craig Erlam. "As it turns out, he rolled up in a tank dressed like Rambo armed with everything from guns to grenade launchers."
Policy easing had been widely anticipated ever since Draghi said at the May ECB meeting that the governing council was "comfortable with acting next time", but that he wanted to see the latest ECB staff inflation projections first.
Those ECB projections were revised lower for each of the next three years, with the expectation for the current full-year cut to 0.7% from the 1.0% the ECB had said it expected in March. The GDP forecast also was revised down to 1.0% for the current year from the 1.2% that was expected back in March.
With the revised forecasts in mind, Draghi announced that the governing council was unanimous in its decision to suspend the sterilisation of the central bank's Securities Market Programme, as well as to introduce a new Targeted Long-Term Refinancing Operation, which will offer low-cost loans to banks to a value of EUR400 million.
The SMP involves the central bank intervening in markets to buy assets in the same way that the US and UK central banks have done. However, unlike the BoE and the Federal Reserve, the ECB "sterilises" the effect of this intervention by taking out deposits equal to the asset purchases, thus balancing the supply of money. To stop this sterilisation process has long been an option suggested by analysts for the ECB and will boost market liquidity.
The ECB president also said the bank has undertaken preparatory work for the introduction of purchasing asset backed securities - meaning that full quantitative easing is being considered as an option if needed.
When asked why the ECB didn't just introduce asset buying now, Draghi said: "Are we finished? The answer is no."
The euro fell to a four month low against the dollar of USD1.3501 in reaction to the announcements, although it has since recovered a little to USD1.3560. The single currency had already priced in most of the announcements, having fallen almost 3% since the May meeting.
Gold spiked to a weekly high, as the prospect of being charged to keep cash on deposit increased the appetite for safe-haven assets. The yellow metal rose about 1%, peaking at USD1,257.65 per ounce, before easing slightly to currently trade at USD1,251.15 per ounce.
By Jon Darby; [email protected]; @jondarby100
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