At their December 8 meeting the European Central Bank announced they would hold at -0.4% their deposit rate and the main refi rate at 0.0%.
The Bank also reduced the rate of QE purchases to €60bn per month to
end Dec 2017. Remember the asset purchase programme runs at €80BN to
But, they warned they may also increase the size or duration of
programme if needed - a warning shot to those traders looking to push
the Euro and Eurozone bond yields too high.
The maturity range also changed to 1-30 years (from 2-30 years) while
the Bank introduces cash as collateral for PSPP securities lending.
HICP (inflation) for next year revised up to 1.3%, GDP to 1.7%.
The reaction by the Euro was surprising in that the currency rallied
in an initial knee-jerk reaction on the news that there would be some
tapering of the Bank's money-printing programme, before slumping sharply
as traders flipped their view on the whole matter.
"It seems the market was taking profits from EUR shorts ahead of the ECB and decided to go short again right after, even thoughwhat
the ECB did should have disappointed. We recently argued that the EUR
could be on a rollercoaster at the end of the year, but what happened
has still surprised us," says Athanasios Vamvakidis at Bank of America Merrill Lynch Global Research.
The amount of bonds bought per month between April and December was
reduced to €60bn down from €80bn which at first glance may appear as if
the ECB is slowing bond purchases but 6 more months of bond buying at
€80bn equals €480bn whereas 9 months of €60bn is €540bn. This
misinterpretation was why EUR/USD popped then dropped after the rate
"In total, this is a larger asset purchase program than investors
anticipated and on top of that, ECB President Draghi was more dove than
hawk," explains Kathy Lien, Director at BK Asset Management in New York.