Markets fall and the euro rises as ECB disappoints
The European Central Bank eased policy further yesterday 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 3.1pc against the dollar after the policy announcement and bond yields surged. Disappointed investors had anticipated a 25pc increase in monthly asset buys, with some even pricing in a bolder deposit rate cut than the move to -0.3pc from -0.2pc.
The euro traded 2.4pc higher on the day at $1.0865 by mid-afternoon, on course for its biggest one-day gain since March.
ECB President Mario Draghi said the market just needed to take time to understand the moves, 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 programme 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.
John Moclair, head of Retail Treasury Sales at Bank of Ireland, said the reaction represents one of those "rare occasions" in recent times when the markets have not responded well to an ECB announcement.
"This probably reflects the high expectations that the markets had built in the run up to the ECB meeting today. All eyes now turn to US payroll data tomorrow, as a prelude to the US FOMC rate decision on December 16," he said.
Still, the improved economic outlook means the ECB can also afford to save some firepower for later, especially after promising data, including lending growth at a four-year high.