What Really Happened at the ECB Conference?

The ECB shortens deposit rates and enlarges asset purchases to 80 billion euros.
Photo: Bloomberg

Stocks went up and the euro significantly fluctuated after the ECB announced new stimulus actions to increase inflation in the eurozone.


The Dow Jones Industrial Average grew by 0.2%, the S&P 500 index increased by 0.2% and the Nasdaq Composite went 0.4% up.


The Stoxx Europe 600 has recently grown by 0.2% while the euro went up 0.6% against the U.S. dollar and is currently at $1.1059.


The ECB announced its last stimulus measures this week, decreasing all three interest rates and broadening asset-buying to enhance the economy and preclude a low inflation rate.


It reduced its inflation targets for this year but also said that interest rates wouldn’t go lower.


In actions that pushed the euro 1% lower against the U.S. dollar, the European Central Bank shortened its deposit rate into the negative and enlarged asset purchases to 80 billion euros from 60 billion.


Although the deposit rate was reduced by 0.1% to -0.4%, the main refinancing rate was cut to 0 from 0.05% and the marginal lending rate went down to 0.25% from 0.3%.


“Rates will be at the low level for a long time and beyond the horizon of our buys,” the European Central Bank’s President Mario Draghi said during a conference, judged for disappointing market performance in December with measures lower than expected.


Purchases are planned to be finished in March 2017.


Draghi also said: “From the current perspective and considering the support of our actions for growth and inflation, we don’t expect that there will be need to reduce rates more.”


The bank also announced it will begin purchasing corporate liabilities and start four new packages of cheap loans, to be extended by banks to the real economy.


Cutting its 2016 inflation expectation from 1% to just 0.1%, the ECB announced that rounds of very cheap loans for four years to banks could have additional financial bonuses for them.


The ECB announced surprising measures to boost Europe’s economy, reducing its main interest rates and extending its active program of buying bonds.


The ECB President Mario Draghi said the projections for growth in the eurozone economy had been reconsidered slightly down — mainly due to the worsened forecasts for the global economy — but he added that he doesn’t expect to cut rates more.


Draghi’s statements made the euro return from its session minimum, and yields on the US Treasury are growing.


The eurozone’s members are currently having an average growth of 1.4% in 2016 while 1.7% was forecasted last December.


HICP inflation in the single currency zone is now 0.1% this year.


While reductions in the growth and inflation forecasts are possible, the European Central Bank said on Thursday that it decreased its main refinancing rate to zero and its deposit rate to -0.4%.


“We can’t get away from extremely low inflation rates due to volatile oil prices,” Draghi said in his interview after the statement.


The ECB also expanded its monthly asset buys to 80 billion euros starting from April. Additionally, the bank will add corporate bonds to its portfolio —investment grade bonds in euros issued by corporations (except for banks).


Also, the ECB will start four rounds of refinancing operations (or TLTROs) beginning in June.


During the usual conference on Thursday, Mario Draghi said that this set of actions will bring momentum to the eurozone’s economic restoration.


The European Central Bank, in a break from tradition, presented actions other than changing rates in the statement.


Draghi added that interest rates would probably stay at current or even lower levels for a long period of time.


He did not accept that the bank was participating in a “race to the bottom” regarding interest rates and added that growing asset buying doesn’t mean currency intervention.


Mario Draghi concluded that TLTROs had shown themselves to be useful and brought a great option for long-term funding for banks that need some refinancing in the current unstable environment.


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