- Cut to deposit rate from -0.2% to -0.3%
- Keep purchases unchanged at E60bn per month
- Extend QE for 6 months to March 2017
These three decisions (and the increase in the breadth of assets eligible) are bang in line with our thoughts this morning in the Macro View, on the mic and on Chat – namely that liquidity constraints in the EZ bond market, the desire to hold something back for future meetings and getting German buy-in mean that market expectations for all three levers to be pulled was, in my view, overly optimistic. Draghi has just revealed that what he has done was not passed unanimously by the Council – suggesting the Germans didn’t fancy what has been delivered.
EURGBP is strengthening on the news (chart below) and EZ equity markets are selling off as these elevated expectations for policy stimulus are wound back in. For our coverage space this is good news for the UK manufacturing sector who have been struggling against a weak Euro that is damaging competitiveness. The announcement should also bring (marginally) closer the timetable for the first increase in U.K. rates (absent a massive shock from PBoC) as the deflationary impact of strong Sterling will be muted if the Euro holds up. My own view is that we still head towards parity USDEUR but at a much slower rate and with a lower risk of undershooting parity.