ECB Juggles Multiple Potential Solutions

Market Trends - 12/11/2015

After corroboration by European Central Bank Governing Council Members in recent speeches and commentary, there is a substantially raised probability that December will see a decision that may reduce basic interest rates, with the euro experienced downward movement in kind. External influences in the global environment like weakness in energy prices may spur the ECB to extend monetary policy measures according to ECB President Mario Draghi. The ideal result of new policy would be to support consumption within the Euro Area and to grow new capital, all of which would spur economic recovery. The export economy in the Euro Area is especially in need of assistance. Its market share has increased in the face of dwindling demand, making the path to a solution a hazy one for policymakers who are hesitant to mangle the situation too badly. Though a rate cut is a possibility, perhaps it is not the best solution. Lower rates reduce incentive to invest in the ECB, where assets placed by foreign traders could be converted into credit used to grow the economy. The current rate of interest sits at 0.05%, with lending and deposit facilities at 0.30% and -0.20%, respectively.


The prospect is debated heatedly within the body of ECB officials that have a say in the matter, with some stating that a cut to rates of 10 basis points will do nothing significant for the economy while others note that the bank stands ready to make deep strokes in order to align with market needs. Of the Union members that agree with the latter notion, Germany is not one of them. In fact, German Finance Minister Wolfgang Schauble is against any change to rates at all, stating that continued intervention in monetary policy will de-incentivize constituent governments from enacting any fiscal reforms.  Alongside Schauble, ECB Vice President Vitor Constancio commented that long-term low rates threaten the solvency of banks and increase inherent risk for the group. The EURUSD pair reacted to the situation by moving lower, though it has recovered since. In the US, Fed policymakers discuss similar issues in today’s meeting, seeing reduced dollar strength as a result.

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