ECB and BOE Keep Rates on Hold 2012.03.09

March 09, 2012 00:01

The European Central Bank (ECB) Thursday maintained its current 1.0% lending rate unchanged, in line with economists expectations. Additionally the ECB President, Mario Draghi made no indications for further easing in the near-term, according to analysts. A large number of banks took advantage of the bank’s 1.0% rate and purchased close to €530 billion in three-year loans last week. Furthermore, Draghi commended the bank’s long-term refinancing operation (LTRO) adding that it provided an array of funding markets to banks. The increase of liquidity is also responsible for increasing demand of sovereign debt and lowering borrowing costs for Spain and Italy from dangerous levels seen last year.

Additionally, the Bank of England (BOE) Thursday held interest rates low at historic 0.5%. The last reduction made to the interest rate was on March 5, 2009. Additionally, the last change to the asset purchases program was on February 9, 2012 with an increase of £50 billion to the current £325 billion to stimulate commercial bank lending. Minutes of the meeting, including reasons underlying the policy decisions are expected to be released on March 21st. Several years back, few would have expected the BOE to continue the low interest rate for three years and have an asset purchase program moving towards £325 billion. The interest rate has never been lower and constancy of a rate has not been seen for over 60 years. The rate has assisted in containment of Britain’s inflation rate within the government set 2.0% target, despite increasing oil prices.

The EURGBP broke above 0.8350 after the rate decisions today. Euro bulls outnumbered the Pound bulls in today’s markets. In addition to the positive news delivered by Draghi, markets were optimistic as Greece appeared to have secured a debt swap agreement. If Greece makes the announcement tomorrow as suggested by initial reports, we expect the EURUSD to 0.8450.

Eugene Ross, Analyst

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