Gold rebounded in early New York trading in Thursday, bolstered by actual ECB action, rather than the talk of action we’ve become accustomed to. The yellow metal reached a new high for the week at 1257.57 before prices moderated somewhat intraday.
The ECB cut their benchmark rates by 10 bps, taking the refi rate to a record low 0.15% and the deposit rate to -0.10%. That’s the first time in history that a central bank has utilized a negative interest rate. That’s right, institutions depositing funds with the ECB now have to pay for that privilege.
Besides the rate cut, the ECB announced some additional measures:
• Targeted longer-term refinancing operations (TLTROs).
• A prolongation of fixed rate, full allotment tender procedures.
• Suspend of weekly fine-tuning operations sterilising the liquidity injected under the Securities Markets Programme.
However, those that were expecting the ECB to announce that they would start there own full-on QE measures were disappointed. Nonetheless, Mario Draghi said the ECB was not finished yet; and given that they’ve thrown everything at the problem but the kitchen sink, the kitchen sink must be next…
“Preparatory work related to outright purchases of asset-backed securities intensified.” ECB President Mario Draghi
I remind you once again of the recent words of Ambrose Evans-Pritchard: “Central banks do not embark on such policies unless something is badly wrong.”
The measures that were announced today were certainly significant, but pretty much in line with expectations. However, the fact that the euro plunged on the announcement to four-month lows suggests that some at least thought Draghi might attempt to jawbone some more.
It’s also worth noting that despite the easing announced today, the ECB cut their inflation forecast for the year to 0.7%, from 1.0% previously. That lends some credence to Draghi’s assertion that they’re not finished yet.
At one point in the press conference a German reporter asked Mr. Draghi what he would say to German savers who suffer from low interest rates. Draghi responded by reiterating. “It’s completely wrong to suggest we want to expropriate savers.” He added that interest rates would go back up when growth returns.
This prompted Neil Irwin, Senior Economic Correspondent at The New York Times to tweet:
My suggestion was a bit more pragmatic:
