Gamers all around the world will be celebrating Nintendo's “Mario Day” today, with it being Mar10, meanwhile, markets have been focused on a different “Super Mario”, as what was expected to be the most challenging ECB meeting took place this morning.
A year ago yesterday, the ECB launched QE and has since spent EUR 700bn (or EUR 60bn per month) on bond purchases and has cut rates to boost inflation. Unfortunately neither policy has been effective enough; inflation actually slipped back into negative territory in February, on an annualised basis. Today the central bank announced: a cut to its benchmark interest rate to zero from 0.05% (a marginal ‘tax’ reduction for banks), the expansion of QE to EUR 80bn a month (more than the EUR10-15bn expected by the market), and a further slice to its deposit rate by 10bps to -0.4%, effective next week. Leading up to the meeting the futures market had already priced in a 100% probability of a rate cut. At Draghi’s press conference, he stated that although he does not anticipate further cuts “new facts could change this situation”.
Having previously failed to deliver to the market back in December, which did wonders for the euro’s competitiveness, this time round the ECB gave the market more than it had bargained for. As a result, the euro rollercoaster continued today, having rallied up against the dollar in the final hours of trading yesterday; starting the day trading at 1.102, the currency sharply fell around 1.5% post-announcement to 1.082; rallying to as high as 1.114, settling pretty flat at 1.104 (at time of writing).
Elsewhere, the Reserve Bank of New Zealand announced a surprise 0.25% rate cut to a record low 2.25%, adding that further easing may be required. Central banks have definitely got their work cut out for them especially as monetary policy, with rates at record lows and no signs of scarce global demand budging, has yet to prove this as an effective tool to boost economic growth. The other concern is that with the scent of global recession hanging in the air, such central banks have even less firepower to deploy in such an event. In fact, pleased with the strong US labour market report last week, Dallas Fed President Kaplan stated that further evidence is required for him to remain comfortable that inflation will meet its objective, adding that the Fed have limited tools if the US should slip into another recession. We will hear more from the Fed next week, after the FOMC meeting on March 16, where the futures market is currently pricing a very small 4% chance of a rate rise.
One wonders whether the world’s favourite plumber, Mar10, along with his side-kick brother Luigi should be employed to consult on behalf of these central banks in order to flush out the dual issues of anaemic inflation and subdued growth.