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ECB interest rate decision leaves investors in uncharted territory

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Investors have expressed concerns over today’s rate cuts by the European Central Bank (ECB) and lamented the lack of progress on an asset purchase programme.

Today, Mario Draghi, president of the ECB, took the bold move of introducing negative deposit rates, now at -0.1%, as the ECB looks to charge European banks for leaving capital in its reserves.

The central bank’s move seeks to deter the parking of capital, and for banks in the euro-zone to provide more finance to consumers and business, to spur on economic growth and stave off deflation. 

The move was coupled with a 10 basis point reduction in the refinancing rate, leaving it a record low of 0.15%.

However, investors and economists have warned that the ECB’s move is public acknowledgement of a fear of deflation in the euro-zone, with work now underway for an asset purchase programme.

Quantitative easing (QE), an asset purchase programme in the UK and US, resulted in central banks purchasing large segments of government debt to boost liquidity in the market and increase inflation.

However, such a programme in the UK artificially boosted the value of Gilt assets, while pushing down the yield of notes, affecting pension scheme valuations.

Dawn Kendall, senior strategist at Investec Wealth and Investment, said: “The ECB has signalled a series of measures to combat [deflation] that have been widely predicted. In short, planning work is underway to commence QE.”

Neil Williams, chief economist at Hermes Fund Managers, was less positive, saying the move was too little, too late.

He said the negative deposit rate would be a red herring given the low demand for credit within the euro-zone and pressure on banking balance sheets, with further rates cuts required.

“The ECB’s ‘ground work’ on private asset purchases may help but are not the bazooka of unlimited sovereign QE it could have fired today,” he said.

“Draghi’s hesitancy to use all his bullets reflects how empty his policy tool box is.”

However, the bank did announce further measures including boosting liquidity in the euro-zone.

Such measures reduced the value in the euro, which have recently affected exporters and euro-zone equity performance.

Andrew Mulliner, portfolio manager at Henderson Global Investors, said: “Whether the measures taken today have the desired effect will take some time for investors and the ECB to divine.

“The impact on credit creation and inflation will only likely be boosted in the medium term, although the ECB has sent a clear message to investors, and the market reaction suggests investors are listening.”

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