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ECB rate cut surprise temporarily provides a jolt, but will it fix anything?

Thursday, 7 Nov 2013 | 4:24 PM ET
European Central Bank
Ralph Orlowski | Getty Images
European Central Bank

The European Central Bank managed to temporarily jolt markets Thursday, cutting rates when it was not expected to act.

While positive in that it could help keep a lid on the euro, the question is whether the ECB's move will have any lingering impact if it is not met with fiscal help.

The ECB cut its main interest rate by a quarter point to 0.25 percent and cut its emergency lending facility by 0.25 percentage points to 0.75 percent. It kept its deposit rate at zero. While speculation increased about a rate cut after a very low October inflation reading, many strategists had not expected the ECB to make a move until December.


CNBC to Draghi: Is this the bazooka?
CNBC's Geoff Cutmore questions ECB president, Mario Draghi, on his communications strategy and whether the latest rate cut is a "bazooka" against "deflationary tanks" facing the euro zone.

"We have seen the dollar weaken and the euro strengthen since the Fed decision not to taper in September. That was pushing the euro up to levels that was causing inflation to drop and a decline in the euro, so I think this is a good move," said Gary Thayer, Wells Fargo Advisors chief macro strategist.

(Read more: ECB rate cut: Analysis and reaction)

"This will help offset some of those potentially deflationary forces in Europe and hopefully keep their economy on the road to recovery," Thayer said.

The euro's steepest losses Thursday were short-lived and the single currency recovered from a low of 1.329 to above 1.34 in afternoon trading. European stock markets also gave back immediate gains. The euro recently reached its highest level in two years, when it touched 1.383 on Oct. 25.

"It (the euro) probably overreacted a little bit," said Robert Sinche, head of global foreign exchange strategy at Pierpont Securities. "I think the psychological effect and the first day trading day effect is probably bigger than necessarily justified."

"We put a sell on the euro when it was 1.38/1.370. It corrected back in line with what we thought was fair value – 134.70," he said. "We don't think there's a whole lot of downside from here. It already had most of its move."

Euro zone still needs structural reforms: Draghi
Mario Draghi, president of the ECB, urges euro area governments to continue to implement the "needed structural reforms" to "sustain fiscal adjustments".

Some analysts said the ECB was late to make a move, and it had let its problems fester. Sinche said while overall euro zone inflation is 0.7 percent, the level diverges from country to country, with Spain at 0.1 percent. "The average covers up the divergences and some of those divergences are getting pretty negative," he said.

"They need to work with the fiscal authorities," he said. "What you need now in Europe is a program set up to encourage lending activity. It's not a liquidity problem. There's plenty of liquidity."

Sinche said European banks appear to have pulled back on lending due to stress tests and new capital rules. Bank loans to non-financial corporations fell 5.5 percent year over year in September, he said.

"They allowed the euro crisis to morph into a slow recovery. The fact is that they've been a bit remiss and they finally now got the wakeup call. If they don't do anything about this small protracted growth, they run the risk of falling back into recession," said George Goncalves, Nomura Americas Treasury strategist. "They're joining the easing train."

—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • Sharon Epperson is CNBC's senior commodities and personal finance correspondent.

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.

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