ECB rolls out more anti-deflation artillery

The European Central Bank stepped up efforts today to kickstart chronically low inflation in the euro area, cutting a key interest rate and extending its controversial asset purchase programme, but financial markets reacted with disappointment.
At the ECB's last monetary policy meeting of the year, the governing council decided that the key deposit rate would be lowered to minus 0.30 per cent.
The deposit rate is normally the interest banks would receive from parking cash overnight at the ECB. But it has been negative since June 2014, meaning banks effectively pay the ECB to hold their funds.
The idea is to encourage banks to lend the money to businesses and households rather than store it at the central bank.

At the same time, the ECB held its other two key rates - the refi and marginal lending rates - unchanged at 0.05 per cent and 0.30 per cent respectively.
In a bid to correct this, the ECB decided to extend the purchases to March 2017 and possibly beyond and to widen the net to include other categories of bonds, Draghi said.

Draghi insisted that the measures were working and that was why the ECB had decided to step up the QE programme.
The ECB was "doing more because it works, not because it fails," he said.
At the same time, "we had to recalibrate our measures due to changing circumstances over the summer," Draghi admitted, insisting that the ECB was ready to do it again if the "external conditions put at risk achievement of our objective."

But financial markets appeared to have expected an even more generous Christmas bonanza.
In afternoon trade, Frankfurt's DAX 30 plunged 3.57 per cent, London's FTSE 100 index lost 1.06 per cent, and the CAC 40 in Paris dropped 1.89 per cent.
The euro meanwhile recovered from close to an eight-month low, jumping to nearly USD 1.09 before settling at USD 1.08 after having struck USD 1.0551 yesterday - which was the lowest level since mid-April.
"Santa Mario did not turn into the Grinch, the Christmas monster. However, (he) left many market participants disappointed like small kids who receive less and smaller presents than expected on Christmas eve," said ING DiBa economist Carsten Brzeski.

Jonathan Loynes at Capital Economics also said the ECB had "failed to live up to its own hype."
The reduction in the deposit rate was "disappointingly small," he said. And the ECB had failed to make up for that with a "decisive" expansion of its asset purchase programme, which had been "merely extended ... From September 2016 to March 2017.