ECB Policy Unchanged

8 September, 2017

Simon Eastman

Yesterday we had the conclusion to the latest European Central Banks interest rate and policy meeting where the announcement was ECB policy unchanged.

As a result, the cost for exchanging sterling to euro became that bit more expensive as the recent pound rally reversed sharply and the rates dropped nearly a cent at its peak, ending the day just over half a cent lower than at the start of trade. The ECB also kept their quantitative easing program as is, currently buying €60 billion euros a month, due to end in December, although did hint they have started looking towards the future and haven’t written off extending the program for longer in the economy worsens. They gave a clear indication that interest rates would not be going up and they wouldn’t consider raising rates until after the current asset buying program had finished. This put a close to recent speculation as to if and when the ECB may raise EU interest rates, which had been speculated about at recent meetings by investors and traders alike. Although this is generally a negative for any currency, as interest rates increasing mean better yield for investors and therefore demand increases for the currency, the single currency euro rallied all the same against both the pound and the US dollar which also gained a cent, breaching the key 1.20 level on EUR/USD.

ECB Policy Unchanged – but Upscale Growth Forecast

In the press conference following the short statement when the decision was announced, Mario Draghi the ECB President, did highlight the fact they have upscaled their growth forecast for 2017. This was a catalyst to the rally alongside a change in their inflation forecasts for the next two years, which still lies under the 2 percent target and will be a concern for Mario and the ECB. While inflation is low they are likely to keep interest rates as they are, to encourage consumer spending and stimulate further growth. The coming months will be interesting to note inflation readings and GDP figures from the EU to get a better outlook on what ECB policy might start to look like once the current QE program finishes in December.

In the meantime, with the Fed looking to keep their interest rate raising cycle on hold again this month and the dollar on the back foot, investor sentiment is likely to remain firmly with the single currency.

The Week Comes To A Close

As the week comes to a close, we have a few data releases to contend with. From Germany we have trade balance alongside import/export figures. Meanwhile in the UK we also have import/export figures and trade balance plus industrial and manufacturing production and later on the NIESR GDP estimate. After lunch from Canada we get their latest unemployment data for anyone who needs to send money to Canada, after yesterday’s interest rate rise, this could throw up some more Loonie strength if the figures come out better than forecast, so make sure to stay in touch with one of the CI team for the latest updates.

ecb policy unchanged - mario draghi