Draghi’s campaign to boost euro zone prompts losses

The expansion of Mario Draghi’s campaign to boost the euro zone economy prompted losses on financial markets after the latest European Central Bank plan stopped well short of expectations.

The initiative is still expected to fan Ireland’s recovery by weakening the euro, which helps exporters, and lowering the cost of servicing the national debt.

It will also benefit mortgage-holders by keeping interest rates low for longer.

“For those on tracker mortgages they will continue to enjoy very low interest payments and those on variable mortgages, although still paying the highest rates of interest in Europe, will have some little consolation in the fact that their rates will not rise as a result of the ECB decision,” said Ciarán Phelan, chief of the Irish Brokers Association.

Deposit rate

Mr Draghi pledged to continue buying €60 billion of sovereign bonds each month until March 2017 “or beyond” and he brought the deposit rate the ECB charges banks to hold their money to record low of minus 0.3 per cent.

His remarks were seen as an implicit open-ended promise to keep intervening in markets until inflation rises, but markets were not impressed.

While moves to prolong the ECB’s quantitative easing scheme are still expected to drive the euro lower against the dollar and sterling, the euro rose almost 4 cent against the US currency to $1.093 after Mr Draghi unveiled the plan.

Stock markets fell as some investors were disappointed with the move. The ISEQ in Dublin down almost 2 per cent and the FTSE 100 in London losing 2.3 per cent. The FTSEurofirst dropped 2 per cent. The Dow fell 1.6 per cent.

“The ECB seems comfortable with the euro around the $1.05 to $1.10 area. We’re still down 22 per cent since May 2014 so today’s action may well slow the speed of the downward move rather than change its direction,” said Garret Grogan at Bank of Ireland Global Markets.

“Even though the euro is stronger today, the broader macroeconomic picture and central bank policies are still divergent. Over time the path of least resistance is for a lower euro.”

The ECB moves comes ahead of an expected US rate increase, the first since 2006, a move which is ultimately expected to lead the Bank of England to increase rates.

Downward pressure

Such developments would exert downward pressure on the euro, particularly as Mr Draghi made it clear that “accommodative” ECB policies can be expected for some time to come.

“We intend to maintain the degree of monetary accommodation and favourable conditions for the liquidity longer for longer horizon than we have been saying so far,” he said.

However, investors had expected an increase in monthly bond purchases to €75 billion and a longer extension of the programme. They also expected deeper cut to the ECB deposit than the minimum decrease of 0.1 percentage points.

Mr Draghi rejected the scepticism. “We are confident that these decisions actually are adequate to achieve our objectives,” he said.

Austin Hughes, chief economist at KBC Ireland, said investors had been completely wrong-footed by Mr Draghi for the first time.

“With markets positioned for the possibility of a larger-than-predicted package of measures, a surprise in the opposite direction magnified the immediate market reaction. As a result, the immediate market response was more typical of what might be seen in the wake of a policy tightening rather than an easing.”