Looking at the reaction on the German stock exchange following the decision of the European Central Bank, it might be concluded that the European institution has disappointed market expectations. The DAX contract dived to a daily low and thus today exceeded 9% losses. Euro temporarily strengthened after the ECB decision, but the price quickly returned to the level from before 13:45.
In the statement issued to the ECB decision on March 12, 2020, we can read that the Governing Council of the ECB decided that the interest rate on the main refinancing operations as well as the central bank loan rate and the central bank deposit rate will remain unchanged, respectively 0.00%, 0.25 percent and minus 0.50 percent This is the first serious disappointment, as investors expected at least a symbolic cut of 10 basis points, as did FED, BoE or RBA.
In the current, unusual situation, the European Central Bank added that it makes interest rates dependent on inflation, using the standard formula that the ECB interest rates will remain at their current or lower level until inflation outlook strongly approaches the level close to, but below, 2% in the projection horizon.
However, the European Central Bank has added to its activities additional long-term refinancing operations called LTROs only to provide immediate support to the euro area financial sector. These are operations carried out just in case since there is currently no liquidity problem in the euro area financial system.
The ECB has stated that it will increase the scale of asset purchases under QE. Purchases will be increased by EUR 120 billion by the end of the year. This is to ensure favorable financing conditions for the economy. QE completion is expected only when it is necessary to raise interest rates.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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