ECB Unexpectedly Cut Interest Rate to Record Low Levels

On Thursday, the ECB sent the markets into frenzy by declaring that they were cutting the interest rate to record low levels of 0.25 percent, down from an already low 0.5 percent.

Loses for the Euro Against a Basket of Currencies

Only last week the euro lost 2 cents against the dollar due to the release of October’s unemployment figures. For this reason, many investors and analysts will argue that the markets had already priced in an ECB rate cut as a result. An interest rate cut like this, however, was not expected so soon, with the majority of analysts predicting that such a cut would come in December at the very earliest.

Not a One-Off Figure

It is thought that the ECB have lowered interest rates due to the threat of deflation. Draghi in particular appears to see October’s drop as more than a one-off figure and, as a result, he’s acted swiftly to prevent a re-occurrence.

Of late, the euro has been relatively bullish but, following the announcement, the euro currently sits 130 pips lower against the dollar and 70 pips below the pound. Craig Erlam of Alpari believes that “the bull run in the euro has officially ended” and that “it’s… downhill from here.”

Press Conference Statements

In the press conference that followed the announcement, Mr Draghi stated that rate cuts reflected an outlook of low inflation and eurozone economic weaknesses. This claim by Draghi also appears to be substantiated, with inflation in the eurozone currently at its lowest level since January 2010, thus stoking deflation fears.

“Weaker than Expected Economic Growth”

Draghi has stated that that the eurozone was currently experiencing “weaker than expected economic activity” and he said that he believes that a plan to keep inflation rates close to but not above 2 percent is essential.

As was widely expected, President Draghi once more committed to the policy of forward guidance and, rhetorically speaking, much of the speech was in keeping with many of his speeches this year, with Draghi appearing much more proactive than any of his predecessors.

A Trickledown Effect for the Entire European Economy

The idea behind cutting the benchmark rate is to make it easier for banks to borrow money from the ECB with the hope that these savings will be passed on to business loans which will, in turn, boost the entire European economy.

Draghi was keen to stress the fact that the ECB are still keen to consider “all available instruments” but refused to answer whether quantitative easing was one of these options available.

Despite the hostility to the announcement, it is believed that the eurozone will benefit from the announcement as it will hugely benefit the exchange rate. Immediately following the announcement, the euro fell another 2 cents against the dollar, following on from last week’s 2 cent loss.

Whether the euro will recover from this shock announcement remains to be seen; as do the trickledown economic effects. One thing that does seem almost certain, however, is that in the short term at least, things appear set to go further downhill.