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Draghi’s stimulus expansion surprises markets
March 10, 2016, 6:10 pm

Draghi told a packed press conference today that the ECB will not cut interest rates further down the line [Xinhua]

Draghi told a packed press conference today that the ECB will not cut interest rates further down the line [Xinhua]

Despite acknowledging that inflation in the 19-member Eurozone is likely to remain very low throughout 2016, the European Central Bank’s chief Mario Draghi announced interest rate cuts and stimulus expansion that went well beyond analyst expectations.

“First, as regards the key ECB interest rates, we decided to lower the interest rate on the main refinancing operations of the Eurosystem by 5 basis points to 0.00 per cent and the rate on the marginal lending facility by 5 basis points to 0.25 per cent,” Draghi told a packed press conference.

Markets had not been expecting a cut to 0.00.

However, analysts were on the mark when it came to the deposit interest rate, which was lowered by 10 basis points from -0.30 to -0.40 per cent.

This would mean that banks that hold money overnight at the central bank would have to pay for the service; it would, therefore, be in their benefit to encourage lending.

Markets were also surprised when Draghi announced an increase of 20 billion – not 10 billion as had been predicted – euros to the ECB’s current stimulus program of monthly asset purchases.

The quantitative easing plan now involves the ECB buying back 80 billion euros ($92 billion) every month until the program terminates in March 2017 – a total stimulus of over 1.4 trillion euros.

The ECB will now also be buying back these bonds from companies, in addition to financial institutions.

Draghi also hinted that the stimulus package could yet again be expanded beyond its deadline next year.

“They [extended stimulus packages] are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its aim of achieving inflation rates below, but close to, 2 per cent over the medium term,” he said in prepared remarks to the media.

Market reaction came quickly. While gold prices jumped 1 per cent and the euro appeared to rebound, London’s benchmark FTSE 100 slumped by 1.78 per cent at close.

The CAC40 in France similarily dropped 1.7 per cent.

The DAX in Frankfurt suffered a greater decline, retreating more than 2.3 per cent at close.

The euro, meanwhile, first dropped and then rose to $1.10 amid Draghi’s remarks that the ECB will stop cutting interest rates from now on.

Across the pond on Wall Street, US stocks retreated as news emerged than an expected meeting of OPEC and Russia would not yield further oil production cuts.

At press time, the NASDAQ fell 1.13 per cent, while the Dow Jones Industrial Average and the S&P 500 both fell just under one per cent.

Oil prices also retreated 2.53 per cent but still held just above $40 a barrel.

US benchmark West Texas Intermediate also fell 1.63 per cent to $37.67.

The BRICS Post with inputs from Agencies

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