HiFX comments on the ECB’s interest rate decision
Andy Scott, associate director of FX advisory services at foreign currency specialists, HiFX, commenting on the ECB’s interest rate decision, said: “The euro fell sharply this Thursday following a series of measures announced by the European Central Bank aimed at staving off the threat of deflation, boosting credit availability and economic activity in the Eurozone. Firstly it announced a cut in the main and marginal lending rates to 0.15% and 0.4% along with the more controversial decision to cut the deposit rate to -0.10%, meaning banks will be charged to deposit funds with the central bank overnight. These cuts were widely expected by the market and had little effect- in fact the euro rose briefly. The sharp fall came as a result of the additional measures announced at the press conference which include a €400bn four year LTRO, offering banks financing against certain assets that have become less liquid or harder to sell, as well as ending sterilisation of its of its Securities Market Programme so that they are adding money into the market when they buy sovereign bonds. This is a big step towards outright quantitative easing and the ECB said it is making preparatory steps for an asset purchase programme. With plenty of evidence that price pressures are going to continue to remain on the downside in the current environment of subdued growth and high levels of unemployment, it revised down its inflation forecast for this year to 0.7% (the current rate is 0.5%) and next year to 1.1%.
“Clearly the ECB felt that having waited as long as it has to act against the threat of continued below target inflation/deflation, it needed to use almost every instrument available to show it means business. The market was caught somewhat by surprise and there’s little doubt that was partly intended since a factor in the ECB’s policy actions is the value of the euro, which has remained high despite the ECB signaling last month that it was planning to ease at today’s meeting. Markets anticipate events and assets, in this the euro, will be priced accordingly. By surprising the market they have driven the euro lower even though they would never admit to that being a specific goal. The pressure has been building for some time now and this was its chance to respond to politicians and the IMF who have called on the ECB to do more to boost growth and lending as the majority of Eurozone economies lag behind the U.K. and U.S. who are expected to see growth of around 3% this year. And as Draghi said, the ECB is not finished yet so we may see it go down the route the Federal Reserve, Bank of England and Bank of Japan all have taken and do its own quantitative easing programme. I suspect that it will see how the next few months’ inflation and growth figures pan out before pushing the button on such a dramatic measure. For now, it has done quite a bit to try and turn the fortunes of the Eurozone economies around. It’s over to the European banks to lend, the consumers to spend and the companies to invest to do the rest. At the time of writing the euro had fallen by three quarters of one percent against both the pound and the dollar.”