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ECB Launches €1 Trillion Rescue Plan

In December 2011, the ECB embarked on two Longer-Term Refinancing Operations (LTROs) to tackle the debt crisis. In other words, it launched two 36-month LTROs in order to support bank lending and liquidity in the euro area money market. The injection of cheap money into the economy - since the central bank’s lending rate is low – means that banks can lend more money to businesses and consumers, which can help the real economy return to growth. The first LTRO in late December 2011 gave 489 billion euros to 523 banks while the second LTRO in March 2012 allotted 530 billion euros to 800 banks. The euro to dollar exchange rate was around 1.3500 at that time.

The Struggle for Euro Area Continues

It was not over yet. Even though most countries of the euro area started to advance again, (in particular, the central and west countries, as well as Ireland), following the LTROs, much of southern Europe remained mired in stagnation and troubling signs of deflation were arising, leaving no more space for the ECB to remain inactive. The central bank, to ensure price stability by aiming for a consumer prices growth below but close to 2 percent, reduced the already record low interest rates. At the time, June 2014, the average inflation rate in the euro area was 0.5 percent, while, even in the largest economy of the euro area, (Germany), the inflation rate was less than 1 percent.

ECB Imposes Negative Interest Rates

In June 2014, the ECB became the first major bank to introduce negative interest rates. The bank applied a raft of measures aimed to stimulate euro area economy, including the decision to cut the interest rate on the deposit facility from zero to minus 0.1 percent. They also introduced cheap long-term loans to encourage banks to lend to businesses rather than hold on to money. Furthermore, the ECB cut its benchmark interest rate to 0.15 percent from 0.25 percent. It should be noted that the euro to dollar exchange rate was around 1.3500 at the time. Following the ECB’s move to cut its interest rates the EUR/USD pair started to lose ground and six months later it was traded around 1.2000, at 5 month low.

ECB Unveils €1.1 Trillion QE Plan

In January 2015, ECB’s President Mario Draghi announced that he will pump €1.1 trillion at a rate of €60 billion a month into the economy in an attempt to prevent the fragile euro zone economy from grinding to a halt. Finally, in March 2015 the ECB began its bond-buying programme, an unprecedented €1.1 trillion bid, to help revive the euro zone economy. The programme was set until September 2016, or until the bank’s Governing Council is confident that inflation is headed back toward the official target.

The ECB’s move to inject €1.1 trillion into the ailing eurozone economy didn’t halt euro’s depreciation. The EUR/USD pair continued to plummet and plunge more than 10 percent in a 3 month period, reaching a 12-year low, at around 1.0450 (March 2015).

ECB Extends the QE until March 2017 and Cuts Deposit Rates

Although the danger of deflation in the euro area was limited, the ECB was concerned that growth was sluggish and bank lending was weak, both of which could potentially derail the fragile economic recovery. Meanwhile, unemployment was already near 12 percent in the euro area and much higher in places like Portugal and Greece. 

As a result, the ECB announced a number of changes in December 2015 to its asset purchase programme to tackle extremely low inflation and boost lacklustre growth. ECB President Mario Draghi announced the central bank would extend its massive €60 billion a month bond-buying scheme to at least March 2017. The ECB also cut its deposit rate further into negative territory to a fresh low of minus 0.3 percent, down from minus 0.2 percent. The falling oil prices and the prospect of a prolonged period of low inflation also seem to have affected inflation expectations.

The EUR/USD pair has been in a sideways phase, between 1.0450 and 1.1600, since March 2015. A few days before the ECB policy meeting (Dec 2015), the price was testing the 12-year lows, around 1.0500. Following the ECB’s decision on December 03, 2015, to extend the QE until March 2017, the pair surged leaving behind the 12-year lows. The pair gained more than 5 percent in a 3 month period, reaching 1.1000 in early March.

ECB Expands Stimulus with more QE and Lower Rates

Fading growth and inflation prospects forced the ECB to review its policy stance on March 10, 2016. ECB president Mario Draghi announced four key measures to boost the euro area economy and lift the inflation rate. The ECB cut the deposit rate by 10 basis points to a historic low of minus 0.4 percent and stepped up the pace of quantitative easing (QE) from €60 billion to €80 billion a month. It also reduced the main interest rate used across the euro area from 0.05 percent to zero. Furthermore, it bolstered the effect with new ultra-cheap 4 year loans to banks, allowing them to borrow from the ECB at negative interest rates, hoping this will limit the damaging side-effects of negative rates for banks. Even though the euro area has had negative rates for deposits since June 2014, this is the first time the ECB has set the rate at which it lends to banks to zero. The EUR/USD pair continued to move north following the ECB policy meeting and reached 1.1600 in early June 2015. Since then, the pair has consolidated between that level and 1.0450.

Euro, ECB, Eurozone, Past and Upcoming, Challenges, Macroeconomics, fx trader, forex ECB ratesFig.2. European Central Bank Rates

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