Image source: Volha Kavalenkava © 123RF.com
Yesterday the Governing Council of the European Central Bank expectedly decided to keep the interest rate on the main refinancing operations in the Eurozone unchanged at 0.00 per cent.
In the monetary policy statement, it was acknowledged that the interest rates in the bloc are likely to persist at their current levels or lower for the foreseeable future, as long as the inflationary pressures remain subdued.
Eurozone Inflation Rate. Image source: TradingEconomics.com
The central bank is interested in sustaining an inflation rate that is close to but below its target rate at 2 per cent. At the current stage, however, the Consumer Price Index in the Eurozone is at 1.3 per cent, up by 0.3 percentage points from the previous period.
In her post-decision statement, the President of the ECB Christine Lagarde addressed the apparent issue of muted inflation that has been persisting for quite a long time.
A point of concern for policymakers in the ECB is the fact that despite the easily accessible liquidity that is provided by the central bank there is still spare capacity in the economy and wage growth remains muted in spite of the substantial levels of financing that is made available to businesses.
The comments of Lagarde could be interpreted as an attempt by the ECB’s new President to suggest that there might be some inadequacies in the current monetary policy, which has been implemented in 1998.
It was later announced that a thorough investigation into the matter would be concluded by the end of the year, which is aimed at evaluating all aspects of the functioning of the current monetary policy.
“Since 2003 the euro area and the world economy have been undergoing profound structural changes. Declining trend growth, on the back of slowing productivity and an ageing population, as well as the legacy of the financial crisis, have driven interest rates down, reducing the scope for the ECB and other central banks to ease monetary policy by conventional instruments in the face of adverse cyclical developments. […] In the light of these challenges, the Governing Council has decided to launch a review of its monetary policy strategy, in full respect of the ECB’s price stability mandate as enshrined in the Treaty.”
The outcome of this review is likely to have profound consequences for the ECB’s current monetary policy in the long-term.
Meanwhile, the euro tumbled on the expressed concerns of muted inflationary pressures and potential inadequacies in the current monetary policy.
The EURUSD broke down below the neckline support of the current head and shoulders pattern at 1.10735. The current downswing is likely to extend itself to the next major support, which is at 1.09985.
EURUSD 4H Price Chart. Image source: Trendsharks ©, created with TradingView.com
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