ECB, Frankfurt (Germany). Image source: iloveotto © 123RF.com
The Governing Council of the European Central Bank is gathering this Thursday to deliberate on the current state of the bloc’s monetary policy.
The general market consensus indicates that the primary interest rate –the interest rate on the main refinancing operations - is likely to be maintained unchanged at the current 0.00 per cent level.
In the last monetary policy statement from the 12th of September, released after the meeting at the Governing Council of the ECB, were published the expectations about interest rate levels:
“The Governing Council now expects the key ECB interest rates to remain at their present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”
Since then the general inflation rate has actually deteriorated, which has raised some concerns amongst investors, some of whom now expect the ECB to implement an even more accommodative monetary stance.
At the time of the last monetary policy decision, the inflation rate in the bloc was recorded at 1.4 per cent, however, since then it was observed that the rate had lessened by 0.2 percentage points to 1.2 per cent, in September.
EU Inflation Rate. Image source: TradingEconomics.com
Thus, the Council might be hard-pressed to act now and deter the current trend of waning price stability across the 28 member-states by cutting the interest rate on the deposit facility, which is already negative at -0.50 per cent.
Cheaper borrowing rates could help improve the dwindling business confidence rate, which is currently suffering from the prolongation of the trade war and the ever-growing Brexit uncertainty.
Business Confidence in the EU. Image source: TradingEconomics.com
It was just revealed on Saturday that Boris Johnson’s trade deal proposal was defeated at the House of Commons, which compelled the PM to request a new extension of the Brexit deadline until the 31st of January 2020.
Overall, the Governing Council of the ECB has to weigh in on the likelihood of the UK's eventual departure from the EU, happening without an agreed-upon trade deal.
In that sense, the Council has to take into account similar non-economic factors for its monetary policy decision on Thursday.
The EURUSD has appreciated with more than 1.20 per cent during last week’s trading session on the hopes of investors that Boris Johnson and Jean-Claude Junker’s trade proposal could be ratified in Parliament.
However, its dismissal on Saturday means that uncertainty surrounding Brexit will return on Monday as the market opens, and the Euro is likely to correct some of the gains it registered last week.
EURUSD 1D Chart. Image source: Trendsharks ©, created with TradingView.com
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