Today it became known that the European Central Bank lowered the rate on deposits, in order to return to the necessary inflationary growth, which has recently caused serious concern for the regulator. Thus, the European Central Bank lowered the deposit rate to -0.5% from -0.4%, but left the refinancing rate unchanged at 0.0%.
This decision was quite expected, but the ECB said that rates would remain at current or lower levels at least until inflation starts to meet the target level. In other words, even in the long term, until inflation returns to around 2.0%, no one will even understand the topic of raising interest rates. This, of course, is a strong bearish signal for holders of risky assets.
More pressure on the euro was created after the regulator announced that it would restart its bond purchasing programme, which few market participants expected. The ECB was not expected to rush, but confine itself to stimulating the economy through low interest rates. As it became known today, asset purchases will be resumed in November of this year, and the ECB will buy bonds worth 20 billion euros per month, while this is necessary.
TLTRO terms will also be amended to support lending. TLTRO operations will be carried out at a refinancing rate, but the ECB will propose measures to mitigate the negative impact on eurozone banks.
Here we are talking about the quite expected system of a differentiated approach to interest rates in order to provide some exemptions for commercial banks, since risks due to negative interest rates, load and reduction in profits can negatively affect the financial system. Thus, the ECB said that for banks that lend above the target level, TLTRO will be offered at a rate corresponding to the rate on deposits.
The data released in the morning on the state of the European economy further complicated the task for the European Central Bank.
According to the report, the largest eurozone economy can expect a recession. At Ifo, the German institute on Thursday lowered German GDP growth forecasts for 2019 and 2020. According to the data, German GDP growth in 2019 will be equal to 0.5%, whereas earlier the economy was expected to increase by 0.6%. In 2020, economists expect growth of only 1.2% against the previous forecast of 1.7%.
Revision of forecasts is directly related to the weakness of the manufacturing sector.
Immediately after this report, data were released on the industrial production of the eurozone, which sharply fell by 0.4% in July this year and fell by 2.0% compared to the same period in 2018. Economists predicted a decline in production of only 0.1% and 1.1%, respectively. In June, industrial production was revised to -1.4%.
In a CNBC interview today, US Treasury Secretary Stephen Mnuchin reiterated that he really looks forward to progress in the course of trade negotiations with China over the next two weeks, as Donald Trump is now ready to raise duties and introduce new ones. Mnuchin once again noted that the United States wants China to buy American agricultural products, and also retreated from manipulating foreign exchange rates.
The US Treasury Secretary also commented on today's decision of the European Central Bank, saying that it is not surprised that the European regulator lowered rates, as it is obvious that the European economy has slowed significantly.
As for the technical picture of the EURUSD pair, the breakthrough of the large support 1.0990 led to the formation of a new bear market, the purpose of which will be the lows of this year around 1.0925 and their update, which will allow sellers of risky assets to approach the levels of 1.0900 and 1.0840.
