ECB Pledges To Keep Rates Low for Longer

Market Trends - 20/10/2016

After rising speculation that the European Central Bank would announce asset purchases tapering heading into the home stretch of the ongoing quantitative easing program, the Governing Council decided to reaffirm the EUR 80 billion in monthly purchases last through March.  More importantly was the emphasis that interest rates would remain at or below current levels for a period of time that would extend past the asset purchase program.  Currently, the main refinancing rate stands at 0.00% with the deposit rate remaining at -0.40% as the lending rate holds steady at 0.25%.  Aside from the guidance on rates staying low, the rate statement was nearly identical to the one published back in September.  It comes at a time when the Central Bank is likely trying to thwart any appreciation in the Euro that threatens the regions trade competitiveness and recovery.  Furthermore, a weaker Euro will conceivably help the ECB reach its inflation targets sooner by elevating the costs of imports.

After hitting the lowest levels since July before the open of European trading on Thursday, the EURUSD remains just shy of a major support level.  With the ECB providing confirmation that it will not be reducing asset purchases despite the shrinking supply of available assets, the Euro is set to remain under pressure despite the more upbeat outlook conveyed by President Mario Draghi during the press conference.  With better credit conditions expected ahead for households and firms on the back of reduced borrowing costs, the ECB seeks to maintain the helpful, accommodative tailwinds.  With all the perceived benefits being reaped, there is a strong possibility that the asset purchase program may be extended past the original March 2017 expiration.  However, to implement such a decision would require an adjustment to the program that involves loosening restrictions on available assets to purchase.  While Draghi’s optimism is lifting the Euro for now, the ongoing asset purchases will continue to pressure the Euro lower, especially against the US dollar considering the stronger American backdrop.

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