The eagerly anticipated ECB meeting didn’t fail to deliver as the central bank eased policy by cutting the base rate by 10 basis points and introducing negative deposit rates for the first time. Setting the deposit rate to -0.1% means commercial banks will have to pay to lodge their surplus money with the central bank rather than receiving interest. In addition to this novel move, the ECB cut its benchmark interest rate from 0.25% to 0.15%.
Caxton FX Currency Analyst Kamil Amin made these comments regarding the latest measures –
“Despite speculation that the ECB would act more aggressively than the market thought, we believe that it was in the best interest of the region’s economy that the rates cut was below the level anticipated by the market. If the ECB had thrown the kitchen sink, there was a possibility that there could have been a backlash with market participants losing all confidence and this would have seen the ECB and President Draghi lose some credibility, which is the last thing the central bank currently needs.”
In the press conference shortly afterwards, Draghi announced that the package of measures includes targeting long-term loans and not limiting the effect of inflows and outflows of capital on the money supply. He also made clear that the ECB would introduce further measures if deflationary pressure remained and this saw a big proportion of market participants cut their euro long positions and cash out causing the rate to rally in and around the 1.24 level.
As Mr Amin assessed – “Draghi stated that the exchange rate was not a policy target and that the economy was more important than inflation and this has seen the euro recover slightly as negative euro sentiment fades. With the current interest rate expected to stay at this level for an extended period of time we should see the market correct on the back of today’s rally and continue increasing in line with the trend we have seen since the start of the year.”
Despite the policy loosening not being as aggressive as some market participants were anticipating, large amounts of volatility crept into the market with the rate rallying past any resistance levels. Though the negative rates may encourage banks to lend more to the private sector but this will also cost them and there is still much uncertainty surrounding the wider implications will be.