European Central Bank Leaves Stimulus and Interest Rates Unchanged

The European Central Bank’s (ECB) last monetary policy meeting in March saw no change to quantitative easing measures or its low interest rates. December 2020 saw the ECB dramatically increase its bond-buying programme even further in efforts to bolster the moribund Eurozone economy, which has been ravaged by the COVID-19 pandemic.

The ECB added EUR 500bn on top of the existing government bond purchases in its pandemic emergency purchase programme (PEPP), taking the total from EUR 1.35tn to EUR 1.85tn.

The central bank also stated that they’d be extending the duration of PEPP from June 2021 to at least March 2022, or until the ECB believes the EU has exited the crisis.

ECB president, Christine Lagarde, stated that the full amount of the PEPP “need not be used in full” should the Eurozone economy recover quickly but could also be extended if necessary.

Since the programme’s announcement last March 2020, lower countries in the Eurozone have benefited from low borrowing costs, which has allowed them to cope with the expense of rebuilding their economies amid the crisis.

The bond yield on Italy’s 10-year government paper fell from session highs above 1.56% to 1.40% moments after the ECB first made their decision public news. Greece, Portugal and Spain experienced similar moves on debt securities.

Their aggressive monetary policy stance is working to contain downside risks for the euro (EUR), which largely outperformed its major currency competitors for the most part of the coronavirus pandemic last year.

Berenberg bank Chief Economist Holger Schmieding noted that the additional stimulus could strengthen the “nascent rebound in household and company confidence that the worst is over.”

Following the ECB’s fresh stimulus announcement, the euro (EUR) climbed higher against the US dollar (USD) and British pound (GBP), though support seems to be fading following the Eurozone’s slow coronavirus vaccine rollout and rising coronavirus cases across the bloc.

The British pound (GBP) has faltered against the euro (EUR), over recent months as a result of delays in the UK’s vaccination programme. The British pound to euro (GBP/EUR) exchange rate is hovering around EUR 1.16, though it’s hoped that the pairing will experience a rise following the reopening of UK businesses.

The US dollar (USD) has also climbed higher against the euro (EUR) due to the continuing positive outlook on the US economic situation, reaching EUR 0.83 during today’s trading session.

Frankfurt Skyline

ECB interest rate decision has little effect on euro sentiment

The ECB announced that they would be holding interest rates at 0% during their last monetary policy meeting, which offered little support to the euro (EUR) in currency markets. The rate on the primary refinancing operations, marginal lending facility and deposit facility stand at 0%, 0.25% and -0.5% respectively.

The central bank’s initial decision to keep interest rates unchanged came after economic data revealed the severity of damage the coronavirus pandemic had inflicted on Europe.

According to Eurostat, EU unemployment rose from 6.4% in March to 6.7% in April last year due to lockdown restrictions. Unemployment levels in Spain, which is one of the country’s hardest hit by the coronavirus, increased to 14.8% in April from 14.2% in last March. Latest figures from January 2021 state that EU unemployment has hit 7.3%.

However, there has been notable easing in the recent economic downturn in the manufacturing, services and construction sectors. With the EU reopening large parts of its economy, business activity in the euro area has recovered slightly after plunging to record lows.

IHS Markit’s EU Manufacturing Purchasing Managers Index (PMI) has risen to 62.5 in March 2021, up from February’s 57.9. Particular countries have performed well during this period, including the Netherlands, with 64.7 and Germany with 66.6.

IHS Markit’s Eurozone Construction has also risen to 50.1 in March, from 45.0 in February, significantly higher than the record low experienced last April of 15.1.

Chris Williamson, chief business economist at IHS Markit, stated “this two-speed nature of the economy will likely persist for some time to come, as manufacturers benefit from a recovery in global demand but consumer-facing service companies remain constrained by social distancing restrictions.”

The European Central Bank previously warned that the EU economy could shrink by as much as 15% in its worst-case scenario due to the coronavirus crisis.

However, as markets expected the ECB to hold its headline interest rate due to the ongoing weakness in the economy, the announcement had little effect on euro-based exchange rates.

Euro outlook: European Commission’s recovery fund proposal

Investors will continue to focus on debates around the European Commission’s recovery fund proposal, which aims to support weaker regions in the EU out of the economic crisis and open possibilities for a future fiscal union between the 27-member states.

Last year, EU Commission president Ursula von der Leyen proposed a EUR 750bn fund to see EUR 500bn distributed in grants and the remaining EUR 250bn in loans.

German Chancellor Angela Merkel and French President Emmanuel Macron have thrown their weight behind the plans, and other member states such as Italy are supporting the proposal. However, there had been opposition from the “frugal four” that is the Netherlands, Austria, Sweden and Denmark who were hesitant to support more indebted countries such as Greece.

While investors have been sceptical about the proposal, they believe it is a positive step towards an integrated bloc and will likely push the euro (EUR) higher against its major trading partners in the long term.

All member states finally agreed on the EUR 750bn deal, following four days of summit talks. The core grants were reduced to EUR 390bn down from the initially proposed EUR 500bn, which was encouraged by France and Germany.

The ECB’s next monetary policy meeting will take place on 22nd April 2021.