His first two easings (November and December last year) were merely unwinding the mistaken rate increases undertaken by his predecessor earlier in 2011. It’s just a shame that it took so long to get to this stage. Beyond the anticipated 0.25% cut in the key benchmark rate (to 0.75%), the ECB also cut the deposit rate to zero, the amount that banks are remunerated for parking funds overnight at the ECB. Deposits have remained high, seen as a reflection of the continued reluctance of banks to lend to each other, rather than lend to the wider economy or each other. But the ECB can only reduce the incentive; the rest is down to the banks.
The market was not fully positioned for a cut in rates and this largely explains the negative reaction from the single currency, which had to break below the 1.24 level before finding some initial buyers. Hopefully there is no-one that thinks today’s move will solve Europe’s many problems, but it goes some way towards giving the banking system a small kick in the right direction and a marginal boost to economic confidence. What will matter in the coming days is how deposits at the ECB react (beyond the end of the reserve period on Tuesday next week), together with market rates (such as EONIA), because it’s here that the first indications will be as to whether the new policy is working in the monetary engine room.
This article is contributed by FxPro. You can view the original article here
