The euro declined sharply
yesterday after the European Central Bank (ECB) released the interest rates
decision for March. As expected, the bank left interest rates unchanged. The
deposit facility rate was left at minus 0.4% while the marginal lending
facility was left unchanged at 0.25%. The central bank also lowered the
guidance for growth for the year, re-affirming the previous guidance. This came
a day after the Organization of Economic and Cooperation Developed (OECD)
lowered the guidance for the year. The organization believes that the global economy
may grow by 3.3%. The previous guidance was for the economy to grow by 3.5%.
The interest rates decision did
not move the market because it was expected. Investors also expected the bank
to lower the growth forecast. What moved the market was the bank’s decision to
extend the period in which it expects to potentially raise interest rates from
‘through summer’ to December. The bank also said that it could leave rates at
this level if necessary. This was viewed as largely a bearish move for the currency
and the ECB’s way of saying that the economy was weak. In the statement, the
ECB said
that:
The interest rate on the main refinancing operations and the interest
rates on the marginal lending facility and the deposit facility will remain
unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council now
expects the key ECB interest rates to remain at their present levels at
least through the end of 2019, and in any case for as long as necessary to
ensure the continued sustained convergence of inflation to levels that are
below, but close to, 2% over the medium term.
Another issue that moved the market
was the decision by the bank to flood the economy with money as a way of
providing stimulus to the region. It intends to do this by providing cheaper
credit to the region’s banks through the Targeted Longer-Term Financing
Operations (TLTRO) program. This program will start in September and run until
2021. The bank is likely to also continue to reinvest the interest gained from
the $2.6 trillion quantitative easing program.
The goal of the European Central
Bank (ECB) is to ensure financial stability in the region and promote exports.
To do this, it is banking on a weaker euro. When the euro weakens, it helps the
region’s manufacturers, who mainly produce for the international market. For
example, a very weaker euro can make cars manufactured by companies like
Mercedes and Volkswagen cheaper in the US. This is an ideal way of fighting the
tariffs that could be imposed by the USA.
In recent weeks, the data
released from the region has largely been weaker. The purchasing managers
index, which measures the activities in the manufacturing sector has been
weaker. The same is true about inflation and the exports market. Italy is in a
recession and Germany avoided a recession by a whisker. France and Spain are
facing political headwinds. Therefore, the measures by the ECB could help the
region. The question is by how much.
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