As of earlier this week, all eyes were on the ECB. People have been awaiting their decision about whether or not to cut rates, and the anticipation caused the euro to fall significantly against the euro. After the public learned of the decision by the European Central Bank to cut interest rates to a record low, the euro is also seeing record lows.
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The European Central Bank cut interest rates to a record low on Thursday to breathe life into a deteriorating euro zone economy and back up measures agreed by government leaders last week to tackle the bloc’s debt crisis.
The quarter-point cut in the ECB’s main refinancing rate to 0.75 percent was in line with market expectations and followed a dire batch of economic data that show even euro zone powerhouse Germany is entering a modest downturn.
European shares extended gains on the news and the euro fell. Of 71 economists polled by Reuters, 48 had expected the bank to cut, most of them by 25 basis points, though some others forecast a larger decrease.
“This outcome is probably the one that is most acceptable to the ECB at this stage,” said Nomura economist Jens Sondergaard, who had forecast a cut to 0.50 percent in the main rate.
“I think the big question is ‘is that a unanimous rate decision’, or are there dissenting members that would have preferred no change?”
ECB President Mario Draghi will explain the Governing Council’s decision at a 1230 GMT news conference.
The ECB’s loosening of policy followed shortly after China and Britain did similar.
In addition to cutting the main refinancing rate, the ECB also reduced its deposit rate, which acts as a floor for the money market, to zero from 0.25 percent.
This move could encourage banks to lend to each other rather than simply parking funds of up to 800 billion euros back at the ECB every night.
The interest rate cut is not seen as a panacea for the euro zone’s problems, which stem from a loss of confidence in state and bank finances, but the reduction in borrowing costs shows the ECB is ready to support the flagging economy.
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The decision by the ECB to cut interest rates was one made to help the constantly worsening euro zone economy, and was a part of an agreement with the government leaders to deal with the area’s debt crisis. The rates were cut to the refinancing rates as well as the deposit rate. This move may encourage banks to sell to each other instead of holding large sums of funds at the ECB at once.
So, what kind of impact did this have on the financial markets in Europe? Judging by the state of the euro, it didn’t have a very positive effect.
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Analysts said although the market had been positioned for a
25 basis point cut in the main refinancing rate, the deposit
rate cut – effectively encouraging banks to lend funds to each
other overnight – caught some by surprise.
“Easing the policy rate is bearish and easing the deposit
rate suggests there may be more to come. We would suggest the
greatest sell is going to be the euro on the crosses,” said
Steven Saywell, head of FX strategy at BNP Paribas.
The euro fell 0.7 percent against the dollar to
$1.2432, after triggering reported stop-loss orders at $1.2495.
Support was expected around last week’s low at $1.2407.
It fell 1 percent against the yen to 98.96 yen.
Earlier in the session the euro briefly jumped after the
Chinese central bank unexpectedly cut its benchmark interest
rates in the latest attempt to protect the world’s
second-largest economy from signs of slowing growth.
Analysts said investors would now be focused on ECB
President Mario Draghi’s news conference, starting at 1230 GMT,
for any hints on how the ECB plans to respond to Europe’s debt
crisis, such as another long-term refinancing operation (LTRO).
Many market players said the rate cut would not tackle
structural problems within the euro zone and the single currency
could come under further selling pressure if no long-term
measures are announced in the ECB news conference.
“It (the rate cut) is more of a symbolic gesture really. It
does not change the finances of any country materially,” said
Patrick Armstrong, fund manager at Armstrong Investment
Management, who expected the euro to fall to parity with the
U.S. dollar in a year’s time.
“We are very negative on the euro, we think all the
structural overhangs on deleveraging, austerity and dealing with
the debt all result in a very weak euro.”
Adding to pressure on the euro, surveys on Wednesday showed
all of Europe’s biggest economies are in recession or heading in
that direction. Spain also paid higher premiums to sell its debt
on Thursday than at the previous auction.
After the ECB made the announcement about the cuts to the main refinancing rate and deposit rate, the euro took another major hit. On Thursday, the euro did very poorly against currencies from all over the world as a result of the new record low interest rates from the European Central Bank. Experts predict that the selling of the euro is going to be much higher than other forms of currencies as people suspect that more rate cuts are soon to come.
At the beginning of the session, the euro had a very brief moment of rise when the Chinese Central Bank cut their benchmark interest rates- an unexpected move made to protect the Chinese economy (the 2nd largest in the world) from signs of a slowdown.
Did you think the decision from the ECB to cut rates was the right one? Are you surprised that the news out of the ECB had such a negative impact?
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