HomeWhat to Make of Yesterday’s ECB Decision

What to Make of Yesterday’s ECB Decision

30 October 2020 By Mircea Vasiu

The European Central Bank (ECB) interest rate decision and press conference brought a wave of selling for the Euro. Most notably, the EURUSD pair dropped well below 1.17, a move certainly welcomed by the ECB. 

The exchange rate appeared in the introductory statement again. As such, the ECB highlights the fact that it closely watches the exchange rate developments and does not tolerate a higher EURUSD rate. In fact, ever since Phillip Lane’s verbal intervention, the EURUSD did not manage to make a new high above 1.20.

Yesterday’s decision and the ECB message fully reflect the situation in Europe – economic slowdown, uncertainty, and deflation; perspectives of a very weak fourth quarter. Because of that, the ECB highlighted that it would waste no time and hinted to more action at its December meeting.

Why Did the ECB Not Act At This Meeting?

Despite the downside economic risks that materialized, the ECB opted for a gradual intervention. Effectively, it means that first, it focuses on communication, and only second on implementation.

Effectively, the central bank hinted at more easing to come in December but not from only one source. For example, it made it clear that it will not look at an increase in the quantitative easing program only. Instead, it aims at delivering a package made of different measures, a package suitable for the current European economic stance.

Another reason for the ECB’s inaction comes from the other side of the Atlantic. The U.S. elections near and Europe has a strong interest in a “blue wave” victory. Should this materialize, it would be a positive for future European economic growth in 2021 and beyond.

Moreover, one day after the elections, the Fed’s decision will likely incorporate the outcome. As such, it could be that the ECB wanted to see what the Fed does in response to the elections before acting.

Finally, the ECB rarely acts when there are no staff projections available. The central bank bases its decisions on the staff economic projections, and they are available only at the December meeting.

Not even the urgency of the second wave of the pandemic was not enough to change the way the ECB decides on the policy. However, it did send a strong signal of more easing to come – a signal strong enough to knock down the Euro.