This morning, the European Central Bank (ECB) introduced negative deposit rates and also cut its main refinancing rate to 0.00%. What this means is that European banks will have to pay the ECB 0.4% of any deposits that they hold with the central bank. This move is intended to get banks to lend money to institutions and individuals in an effort to spur spending, which theoretically will increase economic growth and inflation. All of this comes on the back of decreased growth forecasts for Europe, and overall decreases in inflation. For the first time in a couple of years, central bankers are worried about deflation and the negative feedback loop of lower prices (and lower growth).
It seems that central bankers continue to believe that their policies can have great effects on economic growth. Unfortunately, monetary policy is only one part of sound economic policy. Fiscal policy across the globe continues to interfere with growth, and until politicians come to the aid of central bankers, we will continue to see below average growth.
What does this mean for the markets? As we have seen in previous rounds of rate cuts and quantitative easing (QE), the markets tend to respond very favorably in the medium term. From an outlook, we can take this to mean that central banks will continue to support markets. The Bank of Japan is up next, and followed by the Federal Reserve. While it is harder to predict what the Bank of Japan will do, we are highly certain that the Federal Reserve will not raise rates in March. Again, this is positive for the U.S. stock market.