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ECB Enters Uncharted Waters with Negative Deposite Rate, Euro Tumbles

ECB Enters Uncharted Waters with Negative Deposite Rate, Euro Tumbles

2014-06-05 12:12:00
David Maycotte,
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Talking Points

  • ECB Cuts Deposit Rate to -0.10%; Benchmark Rate to 0.15%
  • Euro Falls Against its Major Peers On Announcement
  • ECB President Mario Draghi Holds Press Conference at 12:30 GMT, May Spark Volatility

The European Central Bank (ECB) went beyond a standard refinancing rate cut, cutting its deposit rate to negative territory for the first time in history. DailyFX Currency Analyst says the negative deposit rate would impact around €100B; prompt enhanced forward guidance with promise for future action; and liquidity measures aimed at helping small- and medium-sized enterprises (similar to the Bank of England's FLS).

Early in May the central bank threatened to loosen policy further, provoking a sharp sell-off in the single-currency. Today they made good on their word introducing rate cuts introduced as a measure to lift ultralow inflation and help euro zone’s already fragile economy.

ECB Draghi press conference (at 12:30 GMT) may provide more clarity on the decision, and help to provide a broader outlook in the single currency.

[See:Trade setups in EUR/USD, EUR/JPY, USD/CHF for the June ECB Meeting]

[ECB Draghi headlines, updated after press conference]

  • ECB decided on combination of measures. Introduces QE and unveils package of target LTROS. Package includes preparations for ABS purchases. ECB extends fixed rate full allotment, suspends SMP Sterilization.
  • Considers non-standard tools within mandate.
  • ECB ready to act swiftly if needed. Council unanimous on using further instruments.
  • ECB sees 2014 GDP Growth of 1% vs 1.2%; 2015 GDP Growth of 1.7% vs 1.5%; 2016 GDP Growth 2016 1.8% vs 1.8%.
  • ECB Draghi says inflation was lower than expected, sees inflation at low levels in coming months. ECB cuts inflation forecast. 2014 CPI at 0.7% vs 1%; 2015 CPI at 1.1% vs 1.3%; 2016 CPI at 1.4% vs 1.5%.
  • ECB monitoring exchange-rate developments closely. ECB Draghi says balance sheet adjustment of key importance, urges banks to improve capital, solvency position.
  • For all practical purposes the ECB is at lower rate bound.
  • Banks will have additional reporting requirements, will check how new funds are used.
  • Rates may stay low longer than previously foreseen. Low interest rates will feed into money market, FX.
  • ECB wants to ensure low rates trasmitted to firms.
  • Draghi says Difficult to say when impact of TLTRO will Appear
  • Low inflation due to Food, Energy, Weak Demand
ECB Enters Uncharted Waters with Negative Deposite Rate, Euro Tumbles

Chart Prepared using FXCM Marketscope 2.0

-- Written by David Maycotte, DailyFX Research Team. Questions, comments or concerns can be sent to instructor@dailyfx.com.

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