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The ECB decided, as expected, to leave interest rate unchanged at 0.75% and the deposit rates at 0%. But the big event of the day was the comments made by ECB President, Mario Draghi, regarding the strength of the Euro against leading currencies including the US dollar: “The appreciation is, in a sense, a sign of return of confidence in the euro“.
This could suggest that if the Euro will remain strong against other leading currencies then ECB might eventually cut its interest rates in the coming months. Currently the Euro/USD is falling.
According to Draghi, the strong Euro suggests the confidence in this currency is coming back. Despite the low growth in the Euro Area in recent quarters, the Euro didn’t tumble against leading currencies such as the US dollar and Japanese yen. One reason might be due to the tight monetary policy of ECB compared to the policies of BOJ or Federal Reserve – they have expanded their respective balance sheet in recent years by printing money.
But Mario Draghi emphasized that the developments in the currencies markets aren’t the prime concern of the ECB even though the stability of the Euro is important for sustaining growth and price stability.
In last month’s rate decision press conference, ECB President refereed to the positive economic developments of the Euro Area. He also stated the inflation rate is likely to decline below 2% by the end of the year. If the EU inflation rate will dwindle, this could halt the recovery of the EU.
ECB, unlike the Federal Reserve of Bank of Japan, isn’t expected to join these central banks and start printing money. This could keep the Euro strong and lower the inflation rate at the expense of the potential growth in the EU economy.
This might suggest that eventually the ECB will have to cut its interest rate in its attempt to jump start the economy. Until then, the Euro is likely to bounce back from its current tumble and remain strong against other leading currencies.
For further reading: Gold and Silver Yearly Outlook For 2013
