Market Overview

ECB Does Not Change Rates; Did Not Discuss Cuts

The ECB did not change its rates earlier today, consistent with investor expectations. Both Spain and France had strong demand for bond auctions today. Spain's yield was nearly 5% on its longest term offering, a significant increase.

With ECB rates holding steady at a record low 1%, today's announcement may be construed as a signal that additional rate cuts will be reserved for a direr situation. Minutes ago, ECB President Mario Draghi completed a press conference discussing the lack of rate change. He claims that the ECB did not talk about decreasing rates, but that the LTRO will continue to have positive effects on European bank liquidity. Investors' focus on ECB rates begs the question, however, if the ECB rates are the key for improved economic growth in Europe. It seems unlikely.

The ECB cannot easily influence economic growth without sending an important constituency in the wrong direction. Lowering rates would increase economic growth in many countries that desperately need it, but it would also increase inflation to undesirable levels in countries like Germany. In his press conference, Draghi drew attention to European inflation that already exceeds 2%. For this reason, lowering rates would currently be inconsistent with ECB's primary mandate of managing Eurozone inflation toward 2%. At present inflation levels, the ECB may be an improbable party to lift many European nations out of sluggish growth.

The EUR/USD pair traded higher after the ECB's announcement. Currently, the pair is trading around 1.316.

Graph provided by Forex.com

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