Currency Corner: ECB has gone all out to fight Europe’s economic woes

Sep 05 2014, 12:06 IST
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SummaryIt is official- the zero-interest rate policy (ZIRP) era is here to stay. After the US Federal Reserve, Bank of England...

It is official- the zero-interest rate policy (ZIRP) era is here to stay. After the US Federal Reserve, Bank of England and the Bank of Japan, ECB president Mario Draghi made it clear that they too would undertake unconventional monetary policy measures. Further, the ECB also surprised the market by reducing all three of its main interest rates by 10 basis points. The benchmark rate was lowered to 0.05 percent, marginal lending facility to 0.3 percent and the deposit rate is now minus 0.2 percent. As expected, the EUR/USD broke the 1.3 quite convincingly and hit lows of around 1.2920 in the US session. The fact that the ECB has moved its deposit rate further into the negative zone is proof of the fact that they will remain ultra accommodative until a sustainable uptick in inflation expectations and economic activity is seen. The weaker euro should also provide support to the economic powerhouse Germany by aiding exports. Note that there has been a major downward revision in the EUR/USD forecasts across major banks. The consensus is now that by year end we will be around 1.25 for the EUR/USD and at 1.2 by 2015 end.

Plans to outline a purchase program for ABS and covered bonds worth as much as 500 billion euros ($656 billion) were discussed by the Governing Council, Reuters reported yesterday, citing unidentified people familiar with the discussions. The program would have a duration of three years and the ECB could start buying the assets this year, it said. In the coming weeks, we will get a clearer picture on this front. But for now this news is enough to keep the global equity rally on and a top is in place in the EUR/USD. Delivering on high expectations, the ECB also announced that it will start, as of

ECB will purchase a broad set of non-financial private sector assets, specifically "simple and transparent" Asset-Backed Securities (ABS) and covered bonds from October 2014. The details of this purchase programme will be announced at the next ECB meeting on 2 October, although Mr Draghi said already that mortgage backed securities will be included. Mr Draghi said that "the newly decided measures, together with the TLTROs will have "a sizeable impact" on the ECB balance sheet and achieve a further credit easing in the Eurozone. However, the ECB president acknowledged that it was difficult to assess, at this stage, how

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