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European Central Bank Keeps Historically Low Rates

The European Central Bank (ECB) has decided to leave Eurozone interest rates at the current levels and revised its 2021 forecast upwards, leading to an immediate reaction in the markets.

What Does This Mean?

This decision to keep interest rates unchanged means that the historically low headline rate of 0% remains in place. A negative rate of -0.5% will still be charged on deposits belonging to commercial banks, in an effort to encourage them to lend more money.

Another area left unchanged is the rate for short terms loans that are made to commercial banks. This will stay at 0.25%. The ECB Governing Council announced that they expect interest rates to remain the same for the foreseeable future.

In fact, they want to keep the rates the same at they are, or even lower, until they can see inflation getting close to 2%. However, they don’t want to see inflation dipping below this figure.

What Else Did the ECB Say?

ECB President Christine Lagarde warned that the services sector has slowed down lately, after having bounced back strongly in the summer. The debt collection process remains a popular option for struggling businesses. On the other hand, she pointed out that the manufacturing industry continues to show signs of recovery.

Despite mentioning concerns over a recent increase in the rate for coronavirus infections across Europe, the ECB gave an improved forecast for the zone’s GDP. After predicting a decline of 8.7% for 2020 a few months ago, the central bank now suggests a fall of 8% for the year.

Looking forward, they predict a growth rate of 5% next year, which would be followed by a 3.2% increase in 2022. However, Lagarde pointed out that there are still risks and uncertainties ahead. While there has been an economic rebound since the lockdown was lifted in Europe, she pointed out that activity levels are still down.

The ECB also has plans in place to launch a €1.35trn scheme to help the Eurozone economy to recover from the damage caused by Covid-19. Called the Pandemic Emergency Purchase Programme (PEPP), it is designed to soften the fall in prices this year.

They are also going ahead with their current quantitative easing programme. This sees the central bank creating new money and then using it to buy government and corporate bonds at the rate of €20 billion each month.

How the Markets Reacted

The Euro enjoyed a surge against major currencies like the Pound and US Dollar when this news was released. In fact, the Pound fell to a 10-week low against the Euro, losing almost a cent as it fell to €1.092.

This swing has also partly been blamed on concerns over Brexit causing the Pound to weaken against the Euro and the Dollar.

Meanwhile, in the US, the jobless figures remain at an extremely high level. 884,000 new unemployment claims were made in the last week, which is the same as the week before. The cumulative total of those who are receiving welfare benefits has risen to 13,385,000.