6th June 2014 ECB Rate Decision Update
The long awaited ECB announcement on its stimulus package provided little in the way of surprises and saw some positive reactions in the European indexes, a muted reaction in the US which then saw the market's rally to records highs and the Asian markets closed mixed with only the Nikkei responded positively.
The European Central Banks chief, Mario Draghi finally announced the planned rate cuts and stimulus package that is designed to help keep the Eurozone on track. Firstly, the ECB deposit rate has been cut from 0% to -0.1%. The central bank will now charge local banks for keeping monies in it reserves overnight. This is engineered to push banks to lend more rather than face having to pay the ECB interest. This is one of the first time this type of idea has been implemented on such a scale and although it has been used in Europe before it is unclear how well it will push the banks hands. Next they reduced their benchmark rate from 0.25% to 0.15%. With a target of 2% being nowhere in sight this decision is probably the one that draws the most criticism due to the implications it entails.
They also announced a €400bn fund which is available until 2018 intended to assist banks in lending longer term and cheaper. Local banks will be entitled to up to 7% of the total amount they loan out, thus giving them access to cheaper monies and enabling them to process more loans. They are also looking at a loan scheme whereby they will bundle up loans from small businesses in the form of bonds, thus reducing banks exposure to small business loan risk.
Although the markets were aware of this sort of level of stimulus for almost a month, the news was still well received. Many analysts felt the announcement was already weighted into the markets and expected a large correction on the news being official. What we saw was a positive response to a positive stance taken by a central bank that is doing its best to avoid simply printing money.
Major Indexes as of 6th June:
Index % Change Close/
DOW Jones (+0.65%) 1,940.46
FTSE 100 (-0.08%)
CAC 40 (+1.06%)
Nikkei 225 (+2.07%)
Hang Seng (-0.15%)
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