Euro falters on ECB hint of negative deposit rate

An interest rate cut from the European Central Bank and hints it may take further measures failed to give European markets a lift Thursday amid ongoing worries about the state of the eurozone economy.

The euro tanked after Mario Draghi, the European Central Bank’s president, said the institution was ready to charge banks that decide to keep deposits at the bank. A negative deposit rate would ostensibly push banks to lend more rather than hoard cash. Draghi conceded he was «frustrated» that the banks weren’t lending more.

The deposit rate is currently zero percent but wasn’t cut alongside the main benchmark rate.

The central bank, which sets interest rates for the 17 European Union countries that use the euro, cut its benchmark rate by a quarter of a percentage point to a new record low of 0.5 percent. The decision was widely anticipated following a grim run of economic data for the eurozone.

Following his confirmation that negative deposit rates were technically possible, the euro fell sharply. It was trading 0.8 percent lower at $1.3074 having traded 0.2 percent earlier in the wake of the interest rate reduction.

Few expect Thursday’s rate cut to make much of a difference to the languishing eurozone economy, which is expected to stay in recession when first quarter figures are published later this month.

“The cut is a symbolic gesture to reassure struggling eurozone countries that it is actively seeking to revive growth,» said Chris Williamson, chief economist at Markit.

“There is little evidence to suggest the rate cut it will feed through to lower interest rates in the troubled peripheral countries, which have remained stubbornly high compared to rates in core countries such as Germany, where lending is seen as a safer bet by banks,» he added.

Given that the rate cut was largely priced in by the markets and ongoing concerns over the state of the eurozone, stocks in Europe were fairly subdued as many investors reacted to Wednesday’s disappointing U.S. economic data following their return from a public holiday.

The CAC-40 in France was 0.2 percent lower at 3,848 while Germany’s DAX rose 0.4 percent to 7,943. The FTSE 100 index of leading British shares, which was not on holiday on Wednesday, fell 0.3 percent to 6,428.

U.S. stocks recovered some ground lost on Wednesday, when a soft private payrolls report from ADP and another lackluster manufacturing survey from the Institute for Supply Management hit sentiment. A drop in weekly jobless claims also helped calm the nerves ahead of Friday’s monthly nonfarm payrolls report, which can set the market tone for a week or two after its release.

The Dow Jones industrial average was up 0.4 percent at 14,753 while the broader S&P 500 index rose the same rate to 1,589.

Earlier in Asia, Japan’s Nikkei 225 index fell 0.8 percent to close at 13,694.04 while South Koreas Kospi lost 0.4 percent at 1,956.39. Hong Kong’s Hang Seng shed 0.3 percent to 22,668.30.

Oil prices recovered alongside Wall Street with the benchmark New York rate up 68 cents at $91.71 a barrel.