The European Central Bank (ECB) has cut its deposit rate to a record -0.5%, lowering the Euro against major currencies, including the Pound.
The ECB lowered the commercial bank rate by -0.1% and introduced a range of measures to encourage more bank lending and stimulate the Eurozone economy against a “protracted weakness” exacerbated by the US-China trade wars. It left its benchmark consumer rate at 0%.
The central bank announced at its September money policy meeting that it will also restart its Quantitative Easing bond purchasing programme in November at €20 billion a month. This will continue as long as necessary, until interest rates start to rise again. The ECB is introducing two-tier system for long-term loans, in which part of banks’ holdings of excess liquidity will be exempt from the negative deposit facility rate.
As a result, the Euro initially fell to a three-month low of 1.124 against Sterling in typical mid-market rates, although it later strengthened again to 1.117.
Ricky Nelson, Head of Corporate Dealing at Halo Financial, says, “The ECB intends to keep interest rates at record lows until inflation rises and is focused on stimulating economic growth damaged by the US-China trade wars.
“The fortunes of the Euro will depend largely on how successful the move is and how quickly the Eurozone economy recovers. A no-deal Brexit could also see the Euro weaken further – although it would also damage Sterling.
“For guidance about Euro currency exchanges for businesses and individuals, talk to your Halo Financial currency consultant
With news earlier in the day that industrial output fell 0.4% in the year to July 2019, Eurozone economic growth predictions for 2019 have been lowered by 0.1% to 1.1% and by 0.2% in 2020 to 1.2%.
However, outgoing ECB President, Mario Draghi admits the predictions do not account for the effects of a no-deal Brexit. They also do not factor in the recent rises in US-China trade war tariffs.
He says, “This baseline scenario is … relatively favorable, because it doesn’t contain the case of a hard Brexit, for example – the probability of which has gone up over recent time.
“And it doesn’t contain some of the trade measures, trade escalation, at least, some of the trade escalation that has taken place since August. So, in this, with this relatively favorable baseline scenario, there was a downgrade in inflation and inflation expectations.”
Following concerns about Germany’s economy going into recession, Mario Draghi, urged Eurozone governments to take “timely and effective action” to increase spending and boost the economy.
The ECB is hoping that inflation moves closer to 2%. “The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
Among those commenting on the decision was US President Donald Trump, who suggested the ECB was successfully weakening the Euro, to the detriment of US exports.
He Tweeted, “They are trying, and succeeding, in depreciating the Euro against the VERY strong Dollar, hurting U.S. exports...” Mr Trump is angry as the US Federal Reserve Bank has held its key rate at 2%-2.25%, compared to 0% in Europe. He argues the United States should also have a rate of 0% or less.
But Mr Draghi said in a press conference that the ECB had a mandate and was not weakening the Euro on purpose.
“We pursue price stability and we don’t target exchange rates. Period.”
Reporters asked if it was likely that ‘helicopter money’ – printing new money and a way to get EU citizens to boost spending – would be introduced if the spending plan fails, but Mr Draghi says the idea has not been discussed.