ECB disappoints markets with bare-minimum easing package

Thu Dec 3, 2015 1:36pm EST
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By Balazs Koranyi and John O'Donnell

FRANKFURT (Reuters) - The European Central Bank eased policy further on Thursday 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 EUR= jumped as much as 3.1 percent against the dollar after the policy announcement and bond yields surged. Disappointed investors had anticipated a 25-percent increase in monthly asset buys, with some even pricing in a bolder deposit rate cut than the move to -0.3 percent from -0.2 percent.

The euro traded 2.4 percent higher on the day at $1.0865 at 1510 GMT, on course for its biggest one-day gain since March.

Defending the moves, ECB President Mario Draghi said the market just needed to take time to understand them, 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 program 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.   Continued...

The European Central Bank (ECB) headquarters are pictured in Frankfurt, Germany, September 3, 2015. REUTERS/Ralph Orlowski