The announcement of cuts to interest and deposit rates, taking the latter into negative territory, was just the prelude to news that the ECB would be undertaking targeted long term refinancing operations (TLTROs).
Negative deposit rates are an attempt to force banks into lending, to stimulate business activity across the eurozone. TLTROs involve providing loans to banks to boost lending as well, in order to overcome the reluctance of financial institutions to release cash.
The ECB also hinted that it would be embarking on asset purchases in due course, with Mr Draghi saying that there was more to come.
There was an immediate positive reaction in equity markets, as investors cheered the attempts to get growth moving, with the Germany 30 reaching the magical 10,000 level. EUR/USD dropped rapidly, after the announcement of the rate cut, but rallied throughout the afternoon press conference.
So, what now? From comments in the press conference, there may be more to come. Mr Draghi said that ‘we are not finished here’, which could rapidly become the new ‘we will do whatever it takes’ phrase.
The ECB has thrown the kitchen sink at the situation and signaled that it will not tolerate low inflation (even if it stubbornly clings to the view that deflation is not a threat).
In my view, quantitative easing has been so widely hinted at by the ECB and others that it is something we will see in due course. However, Mario Draghi must overcome opposition, especially from Germany. Chancellor Merkel avoided making comment on the news, but German private banks were not so circumspect. They have warned that Mr Draghi is risking dangerous side effects, although the unanimous ECB decision is a sign that even the Bundesbank is prepared to go along with the plan for now.
EUR/USD’s bounce from near $1.3500 is likely a short covering move, helped by the ECB president’s suggestion that further rate cuts are unlikely. Mario Draghi’s suggestion of further action suggests that weakness will continue to prevail in EUR/USD, and another attempt on $1.3500 seems likely. Should this be broken $1.3400 becomes the next support level.
Broadly, Mr Draghi seems to have satisfied markets. Now we must wait to see how the TLTROs perform and whether full-blown eurozone QE is on its way.