ECB surprises currency markets with 0.25% cut in interest rate

7th November 2013

The European Central Bank has cut interest rates surprising many economists and markets. The main rate has been cut from 0.5% to 0.25%.

Schroders European economist Azad Zangana says: “The cut appears to be in reaction to the early estimate of annual inflation for October, which was much lower than expected at 0.7%. While leading indicators suggest the Eurozone economy is recovering, the ECB is clearly concerned about the recent strength of the Euro, and the way it has lowered import prices and local inflation.

“The problem of low inflation and higher loan interest rates to households and business is most acute in the crisis hit peripheral Eurozone member states. However, we doubt the latest rate cut will have any impact in lower loan interest rates in these countries, as those banks do not hold adequate capital to lend, regardless of the interest rate.

“The cut in interest rates is a clear signal to the market that the ECB would like a weaker Euro in order to better reflect the state of the overall Eurozone economy. However, with the current account surplus at a record high, you may see the Eurozone’s export competitors crying foul play.”

Luke Bartholomew, investment analyst at Aberdeen Asset Management, says: “With inflation falling and the euro appreciating significantly recently, it makes economic sense for the ECB to cut rates. It is only a surprise to the market because the ECB has been so slow to react in the past.  But Draghi knows that the spectre of deflation is stalking the Eurozone and wants to be seen to be taking action. The rate cut is a strong signal that the ECB will do everything it can to fight deflation and take the action that economic recovery requires.”

(Readers of Mindful Money and in particular Shaun Richards may not be quite so surprised given the article below from Tuesday).

Read more: Will the ECB panic on Thursday?

The news has led to a plunge in the value of the euro.

Chris Saint, head of currency dealing, Hargreaves Lansdown says: “The euro plunged below €1.20 to the pound for the first time since January after the ECB cut interest rates to a fresh low of 0.25%. The decision took financial markets by surprise, although there had been some speculation the ECB could take action after inflation fell to a two-year low of 0.7% last month – well below the ECB’s target level of ‘below but close to 2%’.

“The ECB has been notoriously slow to act but the move now raises the prospect of it using other unconventional policy tools if the euro zone’s economic recovery falters. The Bank will also be hoping to boost the region’s exports by weakening the euro, which recently rose to its highest level in almost two years against the US dollar.”

At the time of writing, exchange rates stood at:

Interbank rate                   % daily change

Sterling / Euro                                   1.2027                                 1.10%

Euro / US dollar                                1.3325                                -1.40%

1 thought on “ECB surprises currency markets with 0.25% cut in interest rate”

  1. Ziad K Abdelnour says:

    More recently, legendary U.S investor Warren Buffett expressed concern
    over the weakness of the U.S. dollar. “Our country has been behaving
    like an extraordinary rich family that possesses an immense farm. In
    order to consume 4% more than we produce – that’s the trade deficit – we
    have day by day, been both selling pieces of the farm and increasing
    the mortgage on what we still own,” he said in 2003 when he announced
    that he had bought a basket of foreign currencies to profit from a
    coming decline in the dollar. It was the first time he ever bought a
    single foreign currency. Five years later, in 2008, he again bet against
    the U.S. dollar and made a bundle.

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