The President of the European Central Bank (ECB), Mario Draghi, has announced that the interest rate in the single currency economy is remaining on hold at the current record low of 0.05% and in fact they are likely to keep rates low for a considerable time to come. Mr Draghi stated that downside risks in the global financial markets are the reason for the Central Bank to have heightened concern about the growth of the Eurozone economy. These comments relate closely to the economic slowdown seen recently in China which two days ago posted their slowest growth figures in 25 years. China is such a key economy for global growth and stability as it exports so much to the rest of the world, and due to its spiraling population, has incredibly high consumption rates meaning they import vast amounts of goods and services and should expect large growth figures. So, as China slows down this reverberates around the rest of the world.
Inflation remains a key focus for the European Central Bank as it did for most of 2015 and with rapidly falling oil prices Mr Draghi and the rest of the ECB are likely to remain cautious about further falls in inflation. With this in mind Mario Draghi stated that he has “plenty of instruments” which in layman terms means that the Central Bank could consider cutting interest rates or deposit rates further or even increasing the amount of money the Bank are putting into the economy via Quantitative Easing (QE). As we have seen in the past the fact that QE essentially means increasing the supply of money in an economy it can weaken that currency’s value. So, even the mere threat of an increase in the QE program can lead to a currency weakening and this is what we have witnessed during and following the speech from Mr Draghi. Euro exchange rates have moved significantly during this afternoon’s trading reaching highs against the Pound Sterling (GBP) of 1.3086 and lows of 1.2914, and highs against the US Dollar (USD) of 1.0921 and lows of 1.0776.
Following this announcement the markets will now be watching every Eurozone economic data set with even closer scrutiny and should we see numbers coming out of the Eurozone disappoint then the speculation of further QE could heighten and we may witness further Euro weakness. Tomorrow there is a further speech from Mario Draghi and the latest set of manufacturing PMI (Purchasing Managers Index) both of which have the propensity to move Euro exchange rates.