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What Impact has the ECB Decision had on Euro Exchange Rates?

The Euro has dropped sharply against its peers today, following a mixed outcome to the European Central Bank (ECB) policy meeting.

Announcements caused a sharp slide in Euro demand, owing to their negative implications for the future.

The Euro has lost out against its main rivals; against the Pound, the Euro has fallen from Thursday’s best rate of 0.8692 to 0.8683. Against the US Dollar, meanwhile, the Euro dropped from Thursday’s best exchange rate of 1.1266 down to 1.1209.

ECB Policy Change on Interest Rates Fails to Reassure Traders

When it comes to economic policy, the ECB has effectively given with one hand and taken away with the other.

On the more positive side, the ECB declared that it will longer consider cutting interest rates. As rates have been at 0% since March 2016, this would have meant negative rates. Under such conditions, those using holding accounts would have to pay to keep the money in place, instead of seeing appreciating interest.

The precise detail of this point was a simple change of statement, from expecting interest rates would ‘[remain] at their present levels or lower’ to ‘at their present levels for an extended period of time’.

This essentially means that the ECB is now finally considering raising interest rates, although ‘for an extended period of time’ is notably unspecific on when this could be.

The statement change on interest rates was the most hawkish aspect of the ECB meeting. Elsewhere, the central bank pledged to expand its quantitative easing program if necessary. This has lowered trader confidence, as buying debt to generate money has been a controversial practice.

The main ECB act of ‘taking away’, however, has been on inflation estimates. The ECB has downgraded its outlook from 2017-2019, predicting annual inflation of 1.5%, 1.3% and 1.6% respectively. These figures would all put inflation below the ECB target of around 2%, which has concerned traders considering future interest rate hikes.

What Next for the ECB? Economists Offer Their Forecasts

While not planning to cut interest rates is a positive step for the ECB, many remain sceptical that it will bring the coveted rate hike anytime soon. Among the cautious commentators has been Professor of International Economics Reto Foellmi;

‘While the short-term costs of prolonging the ongoing monetary regime…seem small, it is not without incident. The actions of the ECB force them to set very low interest rates and to engage in huge bond buying programmes on their own. This spillover effect to other currencies makes it more difficult it is to change the course of action afterwards’.

Offering a critical look at the ECB’s chances of raising inflation has been ING Bank’s Carsten Brzeski;

‘The improved [ECB] outlook has not yet led to any significant inflationary pressure in the Eurozone…subdued inflation rates remain the biggest concern for the ECB. In our view, today’s ECB meeting was the very first baby step towards eventual tapering.

It is obvious that the ECB is trying to be as cautious as possible to very gradually get out of the unconventional monetary policy measures. This process of preparing markets extremely carefully with words and changes in the communication will continue and can take a long while before the ECB delivers new action.’

In brief, this long-awaited policy change from the ECB may not be all it was cracked up to be, so it bears watching future ECB meetings for more detail on policy matters.

Interbank EUR GBP USD Exchange Rates

At the time of writing, the Euro to Pound (EUR GBP) exchange rate was trading at 0.8681 and the Euro to US Dollar (EUR USD) exchange rate was trading at 1.1214.