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Euro plummets on European Central Bank rate hold news

Published: Friday 15 June 2018

The Euro has dropped around 1.5% against most major currencies following the announcement from Europe’s central bank that it expects interest rates to stay on hold until summer 2019.

End of Quantitative Easing
At Thursday’s meeting of the European Central Bank (ECB) in Riga, Latvia, it was also announced that Quantitative Easing (QE) is to halt at the end of the year.

Interest rates unchanged

The bank said interest rates would be left unchanged at the record low of 0.00% for the headline cost of borrowing. Banks will still be charged -0.4% to boost lending.

Euro falls in QE shock

The moves took many economic experts by surprise, as they had expected a decision on QE would not come for another month; and the markets immediately reacted to the interest rates news, with the Euro falling sharply.

The Euro fell from 1.182 in mid-market rates against the US Dollar and at time of writing is around $1.164. Against the Pound, the Euro fell from 0.882 to 0.874. It dropped from 1.534 to 1.514 against the Canadian Dollar and was down from 1.565 to 1.545 against the Australian Dollar.

Halo Financial’s Founding Director, David Johnson, says, “Initially, the Euro rose on the announcement that the €2.5 trillion QE programme was ending, but plummeted on the news that interest rates are set to remain unchanged for at least the next year. This move is seen as a sign of economic uncertainty and has undermined the Single Currency.”

ECB “patient, prudent, and persistent”

At a press conference, ECB President, Mario Draghi, warned about the impact of trade wars and said the bank was determined to be “patient, prudent, and persistent”.

The Governing Council of the ECB took the latest measures after a careful review of the progress towards a sustained adjustment in the path of inflation, macroeconomic projections, measures of price and wage pressures, and uncertainties surrounding the inflation outlook.

The ECB started buying assets from commercial banks in March 2015 as part of its non-standard monetary policy measures. These asset purchases, also known as quantitative easing or QE, support economic growth across the Euro area and help to lower inflation to the target 2%.
Tapering of QE until end of year

The ECB says it will continue to make net purchases under the asset purchase programme (APP) at €30 billion a month until the end of September 2018.

It announced, “The Governing Council anticipates that, after September 2018, subject to incoming data confirming the Governing Council’s medium-term inflation outlook, the monthly pace of the net asset purchases will be reduced to €15 billion until the end of December 2018 and that net purchases will then end.”

Interest rates ‘on hold until summer 2019’

Regarding interest rates, the ECB says, “The Governing Council expects the key ECB interest rates to remain at their present levels at least through the summer of 2019 and in any case for as long as necessary to ensure that the evolution of inflation remains aligned with the current expectations of a sustained adjustment path.”

The Governing Council also announced that it intends to maintain its policy of reinvesting the principal payments from maturing securities purchased under the APP for an extended period of time after the end of the net asset purchases. This would continue as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.

It concluded, “Today’s monetary policy decisions maintain the current ample degree of monetary accommodation that will ensure the continued sustained convergence of inflation towards levels that are below, but close to, 2% over the medium term.”
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