Euro tumbles as ECB weighs negative deposit rates
The euro fell sharply against its major peers amid speculation the European Central Bank is considering negative deposit rates to bring inflation back toward its target. Euro area inflation fell to a four-month low in October, a sign more drastic measures are needed to stimulate the region’s stagnant economy.
Having already cut its benchmark lending rate in half earlier this month, the ECB is strongly considering reducing the rate for lenders who deposit excess cash at the central bank to -0.1 percent.
This means banks would need to pay to deposit cash with the central bank overnight. Such a move, if passed, would signal the smallest interest rate adjustment a central bank has ever made.
The euro fell 115 pips against the US dollar, hitting a session low of 1.3418 in North America. The pair has fallen below 1.34 just once in the past two months. On the other side of the trade, the US dollar was facing mixed results against its peers after economic data was mostly hit or miss. Retail sales hit a three month high, while previously-owned home sales fell to four-month lows.
Elsewhere in Europe, the common currency backtracked against the British pound, falling 61 pips to 0.8338, a two-month low. The pound’s gains were capped by dovish comments from the Monetary Policy Committee, courtesy of the November 6-7 meeting minutes. According to the minutes, the MPC will likely keep borrowing rates favourable well after the unemployment rate hit its target of 7 percent.
It remains to be seen whether the ECB will implement such drastic measures, and whether such measures would have the desired effect. ECB officials will face stiff opposition from Germany, which has been a key opponent of looser monetary policy. The ECB has yet to comment on whether it will pursue such measures, although President Mario Draghi has indicated the central bank is “technically ready” for negative deposit rates.
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