ECB Surprises with Extra Dovish Policies

Weekly Report - 13/03/2016

ECB Lowers Interest Rates, Expands QE


Avoiding a repeat of December’s mismatch of expectations, the European Central Bank delivered strongly, more than the markets anticipated. While the Euro’s initial reaction puzzled many, the markets are digesting the news as by Friday, the EURUSD gave back some of the gains while equities managed to rally.

Weekly Review

Last week was all about the ECB, overshadowing the Bank of Canada and the RBNZ, if not for the surprise rate cut from the RBNZ. Catching the markets by surprise, the Reserve Bank of New Zealand brought down its key lending rates to 2.25%, delivering a 25bps cut and coming out strongly dovish. RBNZ Governor Wheeler did not rule out further rate cuts as inflation in New Zealand remains week amid weakening growth. The fourth quarter GDP numbers are due next week with dovish expectations. The Bank of Canada on the other hand held rates steady at 0.50%. However, Friday's jobs report from Canada showed a dismal print as the unemployment rate rose to 7.30%, the highest since November 2012. While the Loonie fell on the news, USDCAD pared losses on a broadly weaker Greenback. USDCAD touched a new 3-month low at 1.3168 towards late Friday before settling at 1.3215.


The Week Ahead

The ECB's meeting saw Mario Draghi over delivering with broad rate cuts on all the key lending rates. The ECB’s main interest rates are now at zero-percent and the deposit rates were lowered to -0.40%. QE purchases were also beefed up by an additional 20 billion Euros, from 60 to 80 billion Euros per month. However, in the press conference, Draghi ruled out further rate cuts causing the Euro to reverse its losses to post a 2-week high. Clearly, currency wars weren’t on the agenda at this ECB's meeting. EURUSD settled the week at $1.1144. 


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