The fallout was substantial; the Dow reached yet another record high, as did the S&P 500. The DAX briefly reached the giddy heights of 10,000 points for the first time in its 26-year history. Meanwhile, the Euro sunk to a four month low of €1.3558. But what exactly caused these fluctuations? What did the ECB announce?
The markets had been expecting Mario Draghi to institute a range of measures to combat rising fears of Euro-zone deflation; indeed, Mr Draghi had been dropping less-than-subtle hints to that effect for weeks prior. But after the ECB’s long-standing hesitation to act – a hesitation that was even more pronounced after action was taken by the US Federal Reserve and the Bank of England – there was worry that any measures introduced would be slight, that they would fall short of expectations – and markets were wary as a result.
Well, no longer. Mr Draghi’s announcements moved the ECB from the back of the field to the front of the pack. The ECB has now become the first significant monetary authority to reduce its deposit rate below zero, a move targeted to induce banks to lend money to businesses rather than sitting on reserves; if they want to hold onto money, they will have to pay for the privilege. Mr Draghi also lowered the interest rate even further, from 0.25% to 0.15%, as well as offering long-term cheap loans to commercial banks in a tempting package worth around €400 billion overall, specifically designed to encourage them to loan to companies. The loans will have a ceiling of 7% of what banks lend to businesses, encouraging them to lend more to increase the size of the amount they can borrow.
These decisions have not been universally popular, particularly in Germany, a favoured destination for funds parked by banks. Financial figures in the Euro-zone’s most economically sound state have not been slow to react, with the German Finance Minister firing a warning shot across the bows by stating that Germany is not prepared to support several policies intended to protect Spanish and Italian bonds which were announced by Mr Draghi a couple of years ago. Meanwhile, in the aftermath of the announcement commentators have compared Mr Draghi to such disparate figures as Rambo, Otto Von Bismarck and somewhat inevitably, Super Mario. However, despite the mixed reaction to the ECB’s announcements, it cannot be denied that the markets were looking for legislation with teeth – and on that score, it would appear that Mr Draghi has delivered.
The fallout was substantial; the Dow reached yet another record high, as did the S&P 500. The DAX briefly reached the giddy heights of 10,000 points for the first time in its 26-year history. Meanwhile, the Euro sunk to a four month low of €1.3558. But what exactly caused these fluctuations? What did the ECB announce?
The markets had been expecting Mario Draghi to institute a range of measures to combat rising fears of Euro-zone deflation; indeed, Mr Draghi had been dropping less-than-subtle hints to that effect for weeks prior. But after the ECB’s long-standing hesitation to act – a hesitation that was even more pronounced after action was taken by the US Federal Reserve and the Bank of England – there was worry that any measures introduced would be slight, that they would fall short of expectations – and markets were wary as a result.
Well, no longer. Mr Draghi’s announcements moved the ECB from the back of the field to the front of the pack. The ECB has now become the first significant monetary authority to reduce its deposit rate below zero, a move targeted to induce banks to lend money to businesses rather than sitting on reserves; if they want to hold onto money, they will have to pay for the privilege. Mr Draghi also lowered the interest rate even further, from 0.25% to 0.15%, as well as offering long-term cheap loans to commercial banks in a tempting package worth around €400 billion overall, specifically designed to encourage them to loan to companies. The loans will have a ceiling of 7% of what banks lend to businesses, encouraging them to lend more to increase the size of the amount they can borrow.
These decisions have not been universally popular, particularly in Germany, a favoured destination for funds parked by banks. Financial figures in the Euro-zone’s most economically sound state have not been slow to react, with the German Finance Minister firing a warning shot across the bows by stating that Germany is not prepared to support several policies intended to protect Spanish and Italian bonds which were announced by Mr Draghi a couple of years ago.
Meanwhile, in the aftermath of the announcement commentators have compared Mr Draghi to such disparate figures as Rambo, Otto Von Bismarck and somewhat inevitably, Super Mario. However, despite the mixed reaction to the ECB’s announcements, it cannot be denied that the markets were looking for legislation with teeth – and on that score, it would appear that Mr Draghi has delivered.
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