5th September 2014 - ECB Surprise Announcement Review
The European Central Bank made a surprise announcement in Frankfurt yesterday after its meeting to discuss interest rates. With the current run of economic indicators showing that the Eurozone was in serious danger of deflation, many expected a positive announcement, few expected rate changes and a new scheme to be announced at the same time.
Earlier in the year Mario Draghi broke the news that in a first for any central bank, the ECB would post negative deposit rates and a near zero benchmark rate. This along with a program scheduled to start later this month was seen as a way to gauge the reaction within Europe and how it would respond. Just 3 months later we see that the 28 members in the Eurozone did not respond as expected and that the economies within the group were either stagnating or receding far more than expected.
In a move which many thought wouldn't come for before the end of the year, the ECB has not only reduced rates again, but has committed to a new program of stimulus with immediate effect.
In an attempt the stimulate domestic demand by pumping money into the economy and penalizing European banks for holding cash instead of lending it the ECB has reduced its benchmark rate from 0.15% to 0.05% and cut its deposit rate from -0.1% to -0.2%. This along with the new "ABS" Asset Backed Securities scheme which will see the ECB buy bad bank debt and the €400m fund created for European banks to borrow from at reduced rates see's the ECB aim to extend its balance sheet by over 50%, or almost €1 Trillion. These levels have not been see at the ECB since its heyday back in 2012.
With the ABS scheme looking at bad debt as opposed to government debt many will be concerned that we are following on from the mortgage crisis created in the US however the ECB is quick to state that if this round of stimulus is ineffective, they will look to be more creative in its efforts to avoid deflation at nearly all costs.
This change from caution and observation to action and implementation will be appreciated by many of the EU members that are facing austere times and the availability and influx of cash to the economy should be enough to stem the recession the whole region appears to be staring down.
Off the back of his announcement the head of the ECB also revised their economic outlooks for the EU, seeing just 0.9% expansion in 2014 slightly rising to 1.6% in 2015. As it stands they expect inflation to recover to about 0.6% annualized for 2014, almost doubling up to 1.1% for 2015. This is still way below the 2% the ECB see's as its ideal target.
The news saw the Euro drop to a 14mth low of $1.2920 and government bonds in Germany, France, Holland and Austria become far less attractive as their short-term bond yields went negative.
European Markets have opened mixed on the news however they are forecast to react positively for the close of the week.
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