The Euro fell sharply against the Pound and US Dollar on Thursday after the European Central Bank lowered its benchmark interest rate from 0.25% to a new record low of 0.15%, the bank also slashed its growth forecasts for the year ahead.
The ECB also took the step to reduce its deposit rate below zero to -0.1%, making it the first Central Bank to do so.
The idea behind such a move is to encourage the region’s bank to lend more and not deposit as much cash with the ECB.
Further pressure was put upon the Euro as the ECB downwardly revised its economic forecasts for the coming year.
It now expects the Eurozone economy to grow by just 0.1% this year, down from its previous expectations for growth of 1.2%. In 2015 however it expects to see growth of 1.7%, a slight revision higher than its previous forecast for 1.5%. The forecast for 2016 remains unchanged at 1.8%.
ECB President Mario Draghi said at the Banks monthly press conference that today’s rate decision should help bring inflation rates closer to the Bank’s target of 2%.
Draghi also outlined the terms of a new Long-Term Refinancing Operation designed to help banks lend to small companies and help the “real economy”.
It will be €400bn in total, and priced at a mere 10 basis points over the refinancing rate (now just 0.15%)
Banks will be able to borrow up to 7% of the total value of their loans to the ‘non-financial’ parts of the economy, and they can’t use mortgage lending either.
The Euro is expected to fall further during the rest of the session as the markets digest the news. Draghi’s hint that further measures will be introduced is also likely to weigh.
“This is definitely a game changer; they are throwing the kitchen sink at it. The Euro IS going to depreciate,” said a senior currency strategist at Commerzbank.
Euro Exchange Rates
[table width=”100%” colwidth=”50|50|50|50|50″ colalign=”left|left|left|left|left”]
Currency, ,Currency,Rate ,
Euro,
,US Dollar,1.3537 ,
Euro,, Pound Sterling,0.8076 ,
Euro,,Australian Dollar,1.4533 ,
Euro,,Canadian Dollar,1.4799 ,
Pound Sterling,,Euro,1.2382 ,
US Dollar,,Euro,0.7388 ,
[/table]
