Super Mario: another version of ‘whatever it takes’?

5th June 2014

Ian Copelin, Investment Director, my wealth comments “The European Central Bank today cut the main refinancing rate from 0.25% to 0.15%.  It also reduced the deposit rate to minus 0.10% from zero – making it the first major central bank to introduce a negative deposit rate (i.e. the ECB will now charge interest on deposits).

In addition, during the press conference, the ECB President Mario Draghi, announced that the ECB will introduce new ‘targeted’ offerings of liquidity to banks to encourage them to lend money to the real economy.

The move is designed to kick start the economy, which is showing signs of slipping back into recession and to fight the threat of deflation.  While the Eurozone just about managed to eke out GDP growth of 0.2% as a whole during the first quarter of this year, this was predominantly down to Germany, Europe’s largest economy, which grew by 0.8% – France slipped back to zero growth, while Portugal and Italy both contracted.  It was announced earlier this week that Euro-area inflation slowed more than economists forecast in May, falling to just 0.5% from 0.7% in April – and well below the ECB’s target of below, but close to, 2%.

The announcement has weakened the euro from €1.23 to €1.24 against sterling and boosted equity markets (in Germany, the Dax Index today went above 10,000 for the first time).”