ECB Cuts Key Rate to the Bone- Buckle Up!

It took almost everyone by surprise. The ECB’s decision to cut key interest rate by 25 basis points (from 0.5pc. to 0.25pc.) was expected in December or later, not on Thursday, analysts said. And yet most of them think Draghi’s decision was the right one.

“It shows they are taking the risk of undershooting their inflation mandate seriously and they are adding credibility to their forward guidance by extending the full allotment auctions to mid-2015,” head of Pimco portfolio management in Germany Andrew Bosomworth told the Wall Street Journal.

“Now that the policy rate is at the lower bound, it begs the question how the ECB will react next year if growth and inflation fail to materialize? While quantitative easing would be the next logical step, I think the politics of asset purchases and the bifurcation within the euro zone mean the deflationary threshold for QE will be much higher than in other countries conducting this experiment,” Bosomworth added.

Mr Draghi has said since the ECB’s last meeting its view on inflation has changed. He also pointed out the exchange rate was not a policy target and, in fact, euro exchange rate was not even mentioned.