Friday, 11 March 2016

Euro interest rates

Mario Draghi signalled that the ECB [European Central Bank] would cut interest rates again only in the most extreme of circumstances, which allowed the euro to jump at the end of a week that has seen US & UK stocks end flat.

The ECB is facing a tricky balancing act: on the one hand, the central bank wants to leave the door open to cut rates further if needed, while on the other hand they want to signal to the market that they do care about side effects of easing measures on banks’ profitability.

Investors had initially cheered the ECB's announcement that it will cut rates to fresh record lows, start buying corporate debt for the first time and effectively begin paying banks to borrow from it to lend to companies and households. That optimism dissipated as Draghi suggested that years of interest rate cuts may finally be at an end.

When Draghi said future cuts would only happen under extreme circumstances, investors expecting even lower rates switched their strategy to risk off, the risk-on move initially on the back of the ECB accommodation and it put Treasury prices under pressure, but the Draghi rhetoric of 'no more deep cuts' reversed that.

Gold rose as the euro bounced however, Oil prices declined, with U.S. crude easing from three-month highs as refinery maintenance looked set to boost record domestic crude stockpiles.

Will this be enough to help the Italian banks that are on the edge of a precipice? probably not as the FT [Financial Times] reported at the beginning of the week what they need to do is get some growth in their country.

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