The euro hovered near a three-week high on Friday as European Central Bank chief Mario Draghi released a bold easing package, cutting rates and expanding asset buys, at the same time undoing the very stimulus he hoped to achieve by suggesting there would be no further cuts.
The euro gained against the dollar and prompted criticism from some that Draghi had once again disappointed after under delivering in December.
Draghi announced that the ECB would begin purchasing corporate debt and would pay banks for lending to companies in order to kick-start growth and stave off the threat of deflation.
He explained that the reason the ECB had slashed its inflation and growth expectations was that it foresaw a continued slowdown in growth and that even with fresh stimulus, it would not reach its target for years to come.
Market Reaction
The reaction of the markets was swift. At first it cheered the decision but changed directions, after Draghi hinted that there would be no more rate cuts and that it would not implement a tiered deposit rate structure to encourage lending to companies while also punishing banks that hold too much cash.
According to Draghi, “Rates will stay low, very low, for a long period of time and well past the horizon of our purchases. From today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further.”
On Wall Street, the ECB decision brought the benchmark 10-year note down 11/32 in price to yield 1.931 percent, up from 1.892 percent on Wednesday while the 30-year bond was down 11/32 in price to yield 2.699 percent, up from 2.683 percent on Wednesday.
