Mar 9, 2019

European Central Bank re-ups negative interest rates

As expected, Thursday the ECB announced it was keeping its negative interest rates and beginning a third round of its Targeted Longer-Term Refinancing Operations program, which will offer cheap 2-year loans to eurozone banks, linked to lending to businesses and households.

What's happening: It's been clear since January that quantitative tightening is not happening this year, but the ECB is the first central bank in the developed world to actually go in reverse. Policymakers also slashed growth forecasts for the euro area from 1.7% to 1.1%, which was more aggressive than investors had anticipated.

On Wednesday the Bank of Canada left rates on hold and sent a warning that "the slowdown in the global economy has been more pronounced" and that its economy may be weaker than anyone realized.

  • "Although we figured the economy was in for a detour at the end of last year, that detour may wind up being longer than we had expected," Bank of Canada deputy governor Lynn Patterson said a day after the BOC policy meeting.

The intrigue: Both the Canadian dollar and the euro weakened against the U.S. dollar after the respective central bank meetings, but stocks got no juice.

Canada's benchmark S&P/TSX index edged 0.03% higher Wednesday, despite the market now pricing in greater odds of a BOC rate cut than a hike. The pan-European STOXX 600 index lost 0.55% Thursday and MSCI's gauge of stocks across the globe fell for a fourth straight day, its longest losing streak since December.

  • Central banks pulling off the breaks and pumping the accelerator is supposed to be good news for equities.

What they're saying: "The depth of cynicism regarding the risks to global growth was on clear display on Thursday, as a dovish ECB actually increasing accommodation not just removing it slower failed to spur the kind of repricing the Governing Council presumably had wanted," BMO Capital Markets analysts said in a note to clients.

  • "In some ways, this is consistent with the idea that the bar is set very high to avert a synchronized slowdown," the analysts said.
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