business

ECB ‘bazooka’ blows eurozone stocks up

March 10, 2016

European Central Bank's decision to slash its main interest rate to zero percent has sent European stocks soaring. – Reuters file pic, March 10, 2016.Eurozone stocks rallied Thursday after the European Central Bank (ECB) slashed its main interest rate to 0% for the first time, and boosted the amount of stimulus it is pumping into the economy.

While Paris and Milan shot up more than 3% immediately after ECB's monetary policy announcements, they pared their gains after the central bank cut its growth and inflation forecasts.

Paris was up 1.5%, Frankfurt 0.8% and Milan 2.4% as trading opened on Wall Street.

The euro slumped as low as US$1.0822 after the ECB's announcements, down from US$1.1001 late on Wednesday in New York, but bounced back to US$1.1036 as Draghi gave a news conference.

"This makes for a much more dramatic package than had been expected and (ECB chief Mario) Draghi got what he wanted," said Russ Mould, investment director at trading firm AJ Bell.

"Share prices rose, bond yields fell across the peripheral south and the euro fell sharply against the dollar."

He added: "Draghi has now set the stage for next week when central banks in Japan, the UK and US are all set to announce their latest interest rate decisions – and this is likely to have a huge say in whether share prices can beat off the fear of a bear market or not."

The Frankfurt-based ECB said it is cutting its central "refi" refinancing rate to zero percent from 0.05% previously.

At the same time, it lowered the rate on its marginal lending facility to 0.25% from 0.30% and on the deposit facility to minus 0.40% from minus 0.30%.

The bank also announced it would expand the volume of bonds it purchases each month under its programme of quantitative easing to 80 billion euros from 60 billion euros. And it would also start buying corporate bonds under the QE programme.

Previous moves announced by the ECB back in December had underwhelmed investors and were perceived by the financial markets as being half-hearted.

"Following the adverse reaction to December's disappointment and in light of the growing downside risks to the recovery, the (ECB) Governing Council appears to have recognised the importance of not under-delivering again," said economist Jonathan Loynes at research group Capital Economics.

"All told, the ECB deserves credit for learning from its mistake in December.

Confidence across trading floors has been broadly upbeat this month after a recent rally that has seen equities, oil and high-yielding, or riskier, currencies make up some of the hefty losses suffered in January and February.

And there is hope those gains can be built upon after the ECB's decisions.

"But there is no guarantee that its latest 'bazooka' will be any more effective than previous ones in securing the strong and sustained growth required to eliminate the threat of deflation in the currency union and allow the peripheral countries to tackle their debt problems," said Loynes.

Also on Thursday, the New Zealand central bank announced a surprise cut in interest rates to a record low, the first reduction since June.

The move, while welcomed, sent the local dollar plunging 2% against its US counterpart.

In China, official figures showed inflation hit 2.3% in February, the highest in almost two years and beating expectations of 1.8%.

While the figures will be welcomed as a much-needed positive sign after Tuesday's wretched exports data, Shanghai stocks dropped two percent as analysts put the rise down to severe weather that sent food prices spiralling. – AFP, March 10, 2016.