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ECB Leaves Rates at 0.25%

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The European Central Bank (ECB) has just announced that it will hold interest rates steady for another month. The key Refinancing Rate will remain at 0.25%, a level it has been at since November last year.

Realistically there was a very low expectation of the ECB moving this rate at today’s meeting. This is despite the fact that the latest CPI reading from the Eurozone showed inflation to have fallen to 0.5%, just one quarter of the ECB’s target level of 2% and hazardously close to a deflationary situation.

The post announcement press conference later this afternoon will provide the Governing Council Chair, Mario Draghi, the opportunity to outline the ECB’s plans for stimulating price growth.

There are a number of options available to the ECB but given the already loose nature of Eurozone monetary policy these are quite limited. High on the agenda has to be the appreciation of the currency, this is directly contributing to downward pressure on prices is showing no meaningful signs of pulling back from it’s upward trend. Draghi has already stated that the ECB will now be closely watching the Euro but clarity as to what exactly that means would be welcomed.

The deposit rate at the ECB is already at 0%, there is scope for the Bank to enter the realm of negative interest rates here in order to discourage financial institutions from placing funds with them, this would create a market supply of cash as banks seek returns on their money. Alternatively, quantitative easing has been talked about, technically this is not a straightforward solution as the make up of the EU prohibits the ECB from engaging in this activity except in ‘exceptional circumstances’, perhaps we are getting closer to those ‘exceptional circumstances’.

Of course there is always the possibility that the ECB will choose not to act further and instead just attempt to explain that it is comfortable with the inflation rate, markets are unlikely to appreciate such a kick to touch.

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