What to Expect for the Next ECB Rate Statement

Nearly a month has passed since the ECB decided to cut interest rates, and now Governor Draghi and his men are gearing up to make another monetary policy decision. What should we expect this time?

Back in June, ECB policymakers surprised the markets with a set of interest rate cuts instead of just slashing the benchmark rate. Aside from cutting the ECB main interest rate from 0.25% to 0.15%, Draghi also implemented negative deposit rates in order to encourage more lending activity among commercial banks. To top it off, ECB officials also decided to cut the marginal lending rate and introduced new targeted LTRO starting September and December.

At that time, Draghi also emphasized that the ECB is keeping the door open for further easing measures. Other monetary policy adjustments, such as extending the eligibility of collateral assets to prepare for outright purchases of asset-backed securities, confirmed that the central bank is getting ready for potential QE later on. Will they announce these in this month’s policy statement?

A quick look at the recent economic data from the euro zone shows a mixed picture. On one hand, inflation forecasts haven’t been so bad, with the region’s headline CPI flash estimate for June held steady at an annualized 0.5% reading while the core CPI flash estimate for the same month ticked up from 0.7% to 0.8%. On the other hand, PMI readings from Germany and France have been very disappointing while business sentiment, employment, and consumer spending in the region’s largest economy have lagged.

With that, ECB policymakers might decide to sit on their hands for the meantime and wait for the impact of their latest rate cuts to kick in before doling out additional stimulus. Draghi might simply reiterate that rates are likely to remain at record lows for an extended period (Sound familiar?) and that the ECB is still ready to pull the trigger on QE if necessary.

Note that EUR/USD has fallen by roughly 150 pips right after the June ECB statement but has erased those losses throughout the month.

EUR/USD 4-hour Forex Chart

EUR/USD 4-hour Forex Chart

As I mentioned in my review of this event, negative deposit rates have proven to have only a short-term effect on local currencies (ex: USD/DKK and USD/SEK) and that the monetary policy move could eventually translate to stronger lending and currency gains.

Do you think this will be the case for the euro? Or is the ECB likely to announce more QE in their upcoming rate statement and lead to another euro bloodbath? Share your thoughts in our comment box or cast your votes in our poll below!

  • John

    Great summary. I love reading your reports, very informative and interesting.

    It really seems like the ECB can’t keep the Euro weak. I’m expecting further stimulus, but not this time. Maybe some dovish remarks will drag the currency down some 50 pips, but it won’t last.

    • Forex Gump

      Thanks for the kind feedback! Yep that sure sounds like a very possible scenario. What makes this particular event more complicated for EUR/USD is that it’s scheduled along with the US NFP release this week, so I’ll probably watch euro crosses to see if any dovish remarks might have a more pronounced impact. Are you planning on trading this event?

  • ForExchange

    Hi Forex Gump,

    as John writes I also like reading your articles which you probably have seen from the many comments:-)

    I have now two questions that I did not fully understood in the article and maybe you can help me to see it better:

    1. You wrote: “Back in June, ECB policymakers surprised the markets with a set of interest rate cuts instead of just slashing the benchmark rate.” It is said that after 7 months I still have such a question but I am not so familier with the benchmark rate. Can you please explain briefly what is the benchmark rate and what kind of effect it would have had on the EUR? Why did you write that it would have been just easier to slash it than decreasing the interest rate?

    2. The other expression is the “LTRO”. What does it stands for? Why is it important?

    Thanks a lot and good trading with the news

    • Forex Gump

      Thanks for the positive feedback!

      1. ECB benchmark or reference rate simply refers to the main rate that the central bank publishes and applies to loans granted to commercial banks and financial institutions (plus a spread). Adjustments to this interest rate then have an impact on interbank lending rates, mortgage rates, etc.

      2. LTRO stands for long-term refinancing operations, which is the ECB’s term for asset purchases. Basically when they add LTRO, they are purchasing more assets in exchange for euros. In effect, they are adding more to money supply, which is a form of easing.

      Hope this clears things up!

      • ForExchange

        Perfect! Thanks a lot!

  • I agree with the majority of the points in this article and it’s great without any doubt. Really a wonderful post! I like it very much. Here I find everything in details. I hope I will see this type of post again in your blog.

    • Forex Gump

      Thanks for checking out my blog regularly and for the positive feedback. Glad you found it informative and detailed. See you around!

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