The European Central Bank announced it was trimming its benchmark interest rate to 0.00% from 0.05%, surprising investors who were not expecting such a move. The central bank also lowered its deposit facility rate to -0.4% from -0.3%, in accordance with economists’ expectations. In the meantime, the ECB cut its marginal lending rate to 0.35% from 0.30%.
ECB’s policymakers also reported that they were to increase the volume of the central bank’s monthly quantitative easing programme to €80 billion from €60 billion. The measure will go into effect in April, with investment-grade bonds being added to the mix of eligible asset classes.
Speaking at the conclusion of the central bank’s policy review, Mario Draghi stated that the QE programme will be effective until the end of March 2017 or longer, if deemed necessary, and would continue until there is a sufficient increase in inflation. ECB’s president also announced four new targeted longer-term refinancing operations to be launched in June that will have a quarterly frequency.
The European Central Bank also lowered growth forecasts in their most recent projections to 1.4% growth in the eurozone in 2016, from the previous projection of 1.7%, and then 1.7% in 2017 from the previous forecast of 1.9%.
The stimulus measures were decided as the ECB was forced to take new steps to boost the eurozone economy, after consumer inflation went into negative territory again in February, dropping 0.2%.
The immediate reaction of the euro against the U.S. dollar was to fall sharply by approximately 145 pips from the pre-release high. The dollar also found support by a strong jobs report, revealing that the number of people filing for initial jobless claims fell by 18,000 new jobs to 259,000 in the week ending March 5th, well above economists’ expectations.
However, the single currency reversed losses right after Draghi stated that the ECB will likely not cut interest rates further, after employing a stronger-than-expected package of stimulus measures. EUR/USD gained 0.66% to trade at 1.1069.
The euro also reversed losses against the Japanese yen, with EUR/JPY jumping 0.90% to 125.78, higher from lows of 123.66 hit a bit earlier. This was also the case for EUR/GBP, as the pair rose 0.37% to 0.078, after sliding down to lows of 0.7652 before.
Elsewhere, the dollar strengthened against its Canadian counterpart, retreating from a four-month low, as ECB’s decision reduced demand for riskier currencies. The USD/CAD pair reached 1.3310 during early North American trade to subsequently consolidate at 1.3286, up 0.30%.