The European Central Bank announced the first of what is expected to be a raft of measures to stop the Eurozone sliding into deflation, cutting its official deposit rate by 0.1 percentage point to a new record low of -0.3%.
The dollar reacted badly to the announcement, losing two cents against the euro in the minutes that followed before recovering some of its losses. The rate cut is “the minimum expected” by the market after some aggressively ‘doveish’ rhetoric recently by ECB officials, according to Raoul Ruparel at the Open Europe think tank in London. The ECB left its other two official interest rates unchanged.
Markets had bet heavily on an even bigger cut of 0.2 percent or more, and had driven the euro down to a seven-month low of $1.0542 by mid-morning in Europe. After the decision, it But by 0315 ET, it had snapped back to $1.0690.
Typically, the ECB’s most important rate is its refinancing rate, but the deposit rate, which is the rate it charges banks for parking their excess liquidity, has the function of setting the floor for euro money market rates. Lowering it will allow those rates, which feed more directly into rates for private and corporate savers and borrowers, to fall even lower than they are already.
The ECB first cut the deposit rate into negative territory in June, effectively making it a punishment rate for banks holding excess reserves.
The ECB said in its statement that President Mario Draghi will announce other measures to stimulate the economy at his regular press conference, which begins at 0930 eastern time. These will likely involve either the expansion or the extension of the ECB’s quantitative easing program, analysts say.
At the moment, the ECB buys €60 billion of Eurozone bonds each month to increase the base money supply and drive down bond yields, the benchmark for corporate borrowing rates. The ECB has committed to do this until at least the end of September 2016.
Analysts say Draghi’s options include increasing the volume of purchases (which would probably require broadening the types of bonds eligible for purchase under the program), as well as extending the minimum duration of the program back beyond September.
UPDATE: This article has been updated to include more background and context.