The ECB’s decision today to maintain rates while expanding its stimulus measures did not come as a surprise.
By Peter Martin
Friday, January 23, 2015
But the central bank’s pronouncement that it is to embrace full-blown QE, and the magnitude of its bond purchases, has at least met expectations, causing the euro to sink to an 11-year low against the dollar and pushing up stock indices in Europe and the US alike.
ECB president Mario Draghi announced in his press conference following the rate decision today that a bond-buying program to the tune of €60 billion will commence in March and run through to at least September 2016, though the scheme is open-ended enough to continue should inflation goals fail to be met by that juncture. In total, we are looking at stimulus of more than 1 trillion euros. The sovereign debt being added to the suite of asset purchases will be of investment grade only, meaning Greek bonds will not be included as things stand, and of the additional asset purchases only 20% will be subject to a regime of risk sharing, meaning 80% of the risk will be shouldered by the national central banks.
Mr Draghi cited the sharp fall in the price of oil as a factor dragging headline inflation to unfavourably low levels, while also increasing the risk of ‘second-round effects on wage and price-setting’. He also noted that that monetary accommodation thus far has failed ‘to adequately address heightened risks of too prolonged a period of low inflation’. With the ECB’s benchmark interest rates already at their lower bound, the central bank consequently felt it was warranted to expand its balance sheet in order to achieve its goal of price stability.
With the eurozone subject to easing at a time when the Fed is mulling up when to tighten, the effect on EUR/USD was pronounced: the currency pair was down just over 2% by early afternoon in New York at 1.1370, reaching its lowest since late 2003.
The news of the added stimulus boosted the stock markets as well as the dollar. The German DAX, the French CAC 40 and the UK FTSE 100 all enjoyed rises in excess of 1%, while on Wall Street the Dow Jones climbed 98 points or 0.56% to 17,653 and the S&P 500 Index jumped 0.65% to 2045.4.
Domestic economic news was also supportive, with data pointing to health in the labor market and the housing sector. Initial jobless claims fell 10,000 last week to 307,000, though the four-week moving average moved higher. The week in question is the sample week used by the BLS for its monthly employment report and comparing it to the sample week in December, things are not pointing to an improvement in January, though overall levels remain robust.
The Federal Housing Finance Agency (FHFA) said its housing price index rose 0.8% in November, which exceeded analyst expectations and suggests momentum is building, following on as it does from a 0.6% increase in the month prior. Existing home sales data is released tomorrow morning.
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