TH: Euro plummets to 10-month low against the Pound and shares fly on ECB cuts eurozone interest rate to historic new low of 0.25%
European shares soared but the euro tanked against a basket of major currencies after the European Central Bank surprised the markets by cut interest rates to a new record low today.
The euro fell more than 1 per cent against sterling and the dollar following the announcement, while stocks on the FTSE 100, France’s CAC40 and the German bourse also rose sharply. The euro was at a seven week low against the dollar at $1.33 and a 10 month low against the pound to €1.20.
The central bank decided to act after a slump in consumer price inflation in the 17-member euro area, which came in at 0.7 per cent for October well below its 2 per cent target.
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Follow us: @MailOnline on Twitter | DailyMail on FacebookInterest rates have been held at 0.5 per cent since May. They were cut to a then record low of 0.75 per cent in July 2012.
The ECB’s mandate to is keep inflation running at or just a little under 2 per cent but the dramatic fall in CPI triggered fears the euro zone's economic recovery could stall.
Calls from government ministers and industry - the loudest from Italy - for the ECB to loosen policy to help bring down the euro's exchange rate also heaped pressure on the bank. But few analysts expected a move this month with most economists and market watchers calling for a cut in December.
Despite cutting the headline rate to 0.25 per cent, the ECB held the deposit rate it pays on bank deposits at zero and cut its marginal lending facility - or emergency borrowing rate - to 0.75 per cent from 1 per cent.
In July the ECB issued forward guidance in which it said it expected to keep its key rates ‘at present or lower levels for an extended period.’
The rate decision followed that of the Bank of England, which earlier today chose to hold interest rates at 0.5 per cent.
Economists said the cut in interest rates was a clear indication of the level of concern over the attached to the economic recovery in the euro area.
Read more: http://www.thisismoney.co.uk/money/markets/article-2490464/Euro-plummets-10-month-low-Pound-shares-fly-ECB-cuts-eurozone-rate-historic-new-low-0-25.html#ixzz2jy9RqOYu
Follow us: @MailOnline on Twitter | DailyMail on FacebookHoward Archer, chief UK and European economist at HIS Global Insight, said: ‘The ECB’s decision to cut its key interest from 0.50 per cent to 0.25 per cent is obviously the consequence of uncomfortably low and falling Eurozone consumer price inflation.
‘If the ECB had not reacted to eurozone consumer price inflation dropping to just 0.7 per cent in October by cutting interest rates, it could have led the markets to questioning how meaningful the ECB’s forward guidance was.
‘While the drop in eurozone consumer price inflation was obviously the trigger for the ECB’s interest rate cut, the strength of the euro and only gradual Eurozone economic recovery from extended recession also supported the case for lower interest rates.
‘The fact that the ECB chose to act now rather than wait until December when the Governing Council will have the ECB staff’s new eurozone GDP and consumer price inflation forecasts suggests that the bank felt there was a compelling case for prompt action.’
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Follow us: @MailOnline on Twitter | DailyMail on FacebookIshaq Siddiqi, market strategist at ETX Capital Markets, said: ‘ECB chief Mario Draghi today showed he is quite different from former ECB head Trichet, pulling out a surprise like this from time to time.
‘High unemployment in the region also another likely contributor to today’s rate cut – markets are now eyeing Draghi’s press conference for further insight into the decision. The tone of the conference is likely to be dovish with Draghi justifying the move which has knocked the euro currency sharply lower against rivals.’
Azad Zangana, European Ecomomist, Schroders said: ‘While leading indicators suggest the Eurozone economy is recovering, the ECB is clearly concerned about the recent strength of the euro, and the way it has lowered import prices and local inflation.
‘The problem of low inflation and higher loan interest rates to households and business is most acute in the crisis hit peripheral wurozone member states. However, we doubt the latest rate cut will have any impact in lower loan interest rates in these countries, as those banks do not hold adequate capital to lend, regardless of the interest rate.
‘The cut in interest rates is a clear signal to the market that the ECB would like a weaker Euro in order to better reflect the state of the overall Eurozone economy. However, with the current account surplus at a record high, you may see the Eurozone’s export competitors crying foul play.’
