The European Refinancing Rate; Tapering High on the Agenda Amidst Fear of Inflation and The Delta Variant
The European Main Refinancing Rate is the interest rate banks pay when they borrow money from the European Central Bank (ECB) for one week. This operation provides a bulk of liquidity to the banking system. Short-term interest rates are the paramount factor in currency valuation as it is highly correlated with the economic outlook because its changes can impact both inflation and recession.
In the Euro Zone, the core objective of the Governing Council of the European Central Bank (ECB) who is solely responsible for benchmarking interest rates, is to foster price stability by keeping inflation within the optimal range of 2% to 3% over the medium term, achieving full employment and the overall growth of the economy
Surging inflation across the Eurozone as the economy reopens from lockdown has raised the possibility of the ECB starting to rein in its accommodative policy. The institution led by Christine Lagarde developed an asset purchase program in the wake of the coronavirus in March 2020 to support the Euro Zone, the Pandemic Emergency Purchase Program (PEPP) which is due to end in March 2022 has potentially envelope a total of 1.85 trillion euros ($2.19 trillion).
More so, Consumer Price Index (CPI) rose to 3% in August, up from 2.2% in July, as the core CPI also jumped to 1.5%, up from 0.7% the fastest rise in consumer prices in over a decade and well above the ECB’s target of 2%, coupled with the fact that unemployment rate fell by 0.2% to 7.6% in July, continuing a rapid decline since economies reopened from the second wave.
Currently, ECB held its interest rate at a record low of 0.00% which will be a major topic of discourse in the September 9th meeting, as they deliberate on the future of its asset purchase program even though the governing council appears divided about when to start relaxing measures.
Economist believes that the Central Bank will wait a few more months before announcing what it will do about its Covid-related measures, suggesting that the ECB will want to see what happens with the pandemic in the coming months, as the economic situation in the Euro Zone is benefiting from high vaccination rates and overall prudence to avoid lifting all Covid restrictions. According to ECB President Christine Lagarde “having acted promptly and forcefully, we are emerging from this pandemic with economies that have stabilized and recovering. however, focused and target support is still needed for those sectors that have been fully hurt”.
Since suffering a double-dip recession last winter, Eurozone GDP growth has exceeded expectations, official forecasts now expect output to be at pre-pandemic levels by the end of 2021, with the growth of 4.8% this year and 4.5% next year.
Across-board, a Lower refinancing rate will provide a boost to the broader economy by improving cash flow, encouraging spending and investment, which will increase economic activities and boost employment. Regardless, traders should brace themselves up for a period of high volatility as the Main Refinancing Rate report often have a great impact on the FOREX market. An increase in Main Refinancing Rate will usually strengthen the EUR (Euro), while its decrease will usually weaken the EUR (Euro).
Traders should always be aware that volatile markets provide great opportunities for making profits, as the increase in volatility can cause market swings for traders to capitalize on.
The currency pairs that include the EUR (New Zealand Dollar) are mostly affected by the data release. The pairs include: EURUSD, XAUEUR, XAGEUR, EURAUD, EURCAD, EURCHF, EURCZK, EURGBP, EURHUF, EURJPY, EURNOK, EURNZD, EURSEK, EURTRY, EURZAR etc.
Time Schedule for the next Main Refinancing Rate Report:
Date: Thursday, September 9th, 2021.
Time: 12:45pm (GMT + 1).
Author: Francis Idowu
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