EUR/GBP falls below 1.25 for the first time in over a year as ECB leaves key interest rates steady at record - General

Hugo Tiago Teixeira Aboim O Neill 2014.12.04 08:20 #1951

Bearish downtrend continues as expected and 1.2350 was broken, reinforcing bearish momentum for the trend. Bears remain in control of the pair below the 10-day moving average, currently at 1.2425. The fundamental explanation for the bearishness on the Euro sums up nicely on the following title: “Eurozone suffers from low potential growth and weak competitiveness, while political support for reform remains limited.”

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thenews 2014.12.04 12:54 #1952

ECB leaves key interest rates unchanged

The European Central Bank left its key interest rates unchanged at record lows Thursday, reinforcing its position that borrowing costs cannot go any lower despite inflation weakening further below the bank's target.

The ECB left its main interest rate, the cost of borrowing at the central bank's regular loans, at 0.05%. It also left its deposit rate at -0.2%, meaning that banks continue to pay for parking excess reserves at the central bank.

With rates near zero, attention has turned to asset purchases as the primary means for the ECB to further stimulate the eurozone's struggling economy and raise ultra-low inflation, which at 0.3% on an annual basis last month was far below the ECB's target of just below 2%. Analysts at Barclays expect annual inflation to weaken to zero this month on the back of lower oil prices.

ECB President Mario Draghi is due to begin his monthly press conference at 1330 GMT, and analysts will carefully scrutinize his remarks for any hints on the ECB's next steps, particularly whether the bank will engage in large-scale purchases of government bonds in coming months.

The central bank is buying asset-backed securities and covered bonds under programs announced in September. The ECB expects these measures, along with cheap four-year loans to banks, to raise the volume of its balance sheet by about 1 trillion euros ($1.23 trillion). The size of a central bank's balance sheet is an indication of how accommodative its policies are to promoting investment and economic growth.

There are increasing doubts in financial markets as to whether these policies will do the trick, raising pressure on the ECB to do more. Some top members of the ECB's 24-member Governing Council have voiced openness to large-scale purchases of sovereign bonds, known as quantitative easing or QE.

This has been a key part of policy responses from the U.S. Federal Reserve, Bank of England and Bank of Japan. But the ECB has largely refrained from going down this route amid worries, especially from Germany, that such a policy would stoke inflation and discourage countries from reforming their labor markets.

Economists don't expect the ECB to announce QE on Thursday. ECB Vice President Vitor Constancio said in a speech last week that the central bank would only be able to discern if current policies are working in the first quarter of next year.

Still, analysts expect Mr. Draghi to signal that the ECB is getting closer to launching QE. "The ECB statement and Mr. Draghi's comments are also likely to strike a very dovish tone, indicating that QE is very much an option in the early months of 2015," said Howard Archer of IHS Global Insight in a research note Tuesday.

The ECB will also publish its quarterly staff forecasts on growth and inflation at Thursday's press conference. Mr. Archer said that if the staff slashes the inflation forecast for 2016, most recently set at 1.4% in September, "it will magnify the pressure for more ECB action."

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thenews 2014.12.04 14:22 #1953

Draghi: ECB to assess need for more action early next year

The European Central Bank will judge early next year whether it needs to take more action to revive the euro zone economy, President Mario Draghi said on Thursday.

The ECB's Governing Council was unanimous in its willingness to launch measures such as a government bond buying programme with new money if necessary, Draghi told a news conference after the ECB kept borrowing costs at a record low.

The euro zone's central bank has set itself a goal of expanding its balance sheet -- buying assets from banks and others in return for cash in the hope it will be pushed into the economy –- by up to 800 billion or even 1 trillion euros ($1.24 trillion) back to early 2012 levels.

With interest rates essentially at zero that has become the policy target.

"Early next year the Governing Council will reassess the monetary stimulus achieved, the expansion of the balance sheet and the outlook for price developments," Draghi said.

"Should it become necessary to further address risks of too prolonged a period of low inflation ... this would imply altering early next year the size, pace and composition of our measures."

Technical preparations for such a move were being stepped up, he said.

In the meantime, it will gauge the impact of ultra-low interest rates, cheap loans given to banks and buying of repackaged loans in an attempt to kick-start lending.

New forecasts by ECB staff sharply downgraded the euro zone's growth outlook for next year to 1.0 percent from the 1.6 percent predicted in September.

Inflation is seen at just 0.7 percent in 2015, down from a September forecast of 1.1 percent and way below the ECB's target of close to but below 2 percent.

"The risks surrounding the economic outlook for the euro area are on the downside," Draghi told reporters in the ECB's new 1.3 billion euro headquarters, an imposing Frankfurt skyscraper designed to show the strength of the currency.

Draghi said particular attention would be paid to the oil price which has tumbled nearly 40 percent in the second half of the year. "We won't tolerate prolonged deviations from price stability," he said.

ECB Vice President Vitor Constancio had previously said the bank would be better able to gauge in the first quarter of next year whether it needs to take the ultimate policy step into quantitative easing.

Mounting concerns about the euro zone economy were underlined by the U.S. Federal Reserve's influential vice chairman, Stanley Fischer, who said money-printing would help Europe as it had the United States.

"If the ECB moves in that direction, it will have positive effects," Fischer, who was Draghi's academic mentor at university, told a newspaper in Italy.

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