Europe Back On The Wagon

ECB cuts target interest rate

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What's going on?

The European Central Bank (ECB) cut its target interest rate on Thursday and controversially resumed its “quantitative easing” (QE) program amid gloomier predictions for economic growth.

What does this mean?

The eurozone’s central bank reduced baseline interest rates to a record low of -0.5% in its first cut since 2016. It’ll also start buying $22 billion worth of European government and company bonds every month starting from November, reviving a program it only ended last December in a bid to encourage more economy-boosting borrowing and spending (tweet this). Some, however, question QE’s effectiveness – and timing, given new ECB leadership is imminent.

Keeping interest rates lower for longer than expected might be necessary: the Bank simultaneously lowered its forecast for eurozone economic growth and inflation yet again. That was supported by separate data on Thursday that showed European industrial production shrinking more than anticipated.

Why should I care?

For markets: It’s one rule for us…
European government bond yields fell following the ECB announcement as prices rose in anticipation of a big buyer re-entering the market (remember, the two move inversely). Stock prices, meanwhile, lifted at the prospect of cheaper borrowing boosting profits. But not every company will be happy. While the ECB is promising to protect some European bank deposits from being eroded by negative rates, the bosses of big US banks have already bemoaned the effect lower global interest rates are having on their lending businesses.

The bigger picture: … and another for them.
The US president instantly lashed out on (you guessed it) Twitter following the announcement. Echoing previous comments on Chinese “economic stimulus“, he accused the ECB of trying to further devalue the euro versus the American dollar in a bid to attract overseas trade and investment. He also called for the US central bank to deepen its own expected cut to interest rates next week – already its second in two months. If US rates do remain positive, trade-based retaliation against Europe is within the president’s power…

Originally posted as part of the Finimize daily email.

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