Shock ECB Stimulus Package Fires Up Markets

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Shares jumped in the New York, London and Europe as the European Central Bank surprised the markets with a new raft of measures aimed at stimulating the Eurozone economy.

Not only did shares rise, but the value of the euro plunged against the US dollar, the pound and Swiss franc.

The drop in the euro against other currencies makes imports more expensive and goods exported overseas cheaper.

The new program came out of nowhere after the ECB has suffered criticism for inaction over the European economy for years.

What does the package cover?

The ECB stimulus came out of the blue and includes:

  • Cranking up quantitative easing from 60 billion euros a month to 80 billion euros a month – and expanding the scheme to buy corporate bonds as well as government debt
  • Slashing the bank deposit rate from -0.03% to -0.04%. This makes parking money on deposit more expensive for banks
  • The ECB official interest rate is reduced to zero, down from 0.5%

The shock announcement by ECB president Mario Draghi lit blue touch paper under financial and currency markets.

Within a short time, the euro lost 1% against the dollar and 0.5% against the pound.

Stock markets in Frankfurt and Paris leapt up by more than 2%, while European bank shares also made large gains.

Drahi fires his biggest bazooka

“ECB interest rates are expected to stay at these very low levels for some considerable time,” Draghi said after his announcement.

Drahi explained he expected the stimulus package to increase Eurozone growth by 1.4% this year and up to 1.8% in 2018.

Draghi and the ECB must be crossing their fingers that this package will boost the Eurozone economy, because now their box of tricks is empty and developing new strategies has become a lot harder.

As one trader put it, Draghi has fired his biggest bazooka at the economy and he better have scored a direct hit because he has no ammunition left.

“The plan is to boost growth and to push up inflation,” said Draghi.

Effectively, the ECB is offering banks free money, because the conditions of the stimulus agree the ECB can pay interest at 0.4% on loans to banks.

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