On Thursday, the European Central Bank (ECB) surprised markets and made significant moves on monetary policy. This decision ushers in an unprecedented reassessment of the euro area economy. During the latest monetary policy meeting, the ECB no longer labeled its stance as “restrictive,” indicating a more supportive approach to economic conditions. The Federal Reserve’s continued belief in a rosy outlook for inflation. This smart move signals their understanding of the substantial and persistent headwinds ahead in the world.
And in an unprecedented step, the ECB reduced its Deposit Rate by 25 basis points to 2.25%. This amendment aims to jumpstart economic recovery. It arrives as a welcome balm to heightened trade tensions, which are beginning to take a toll on the region’s outlook. Just last week, the ECB declared that the euro area economy has weathered global shocks with remarkable resilience. Yet the international environment continues weighing on prospects, prompting a downgrade in the general short-term growth outlook.
According to the ECB’s new economic outlook published 18 March, the inflationary pressures have subsided. March headline and core inflation rates decelerated, with a clear downward trend in inflation services over the past few months. The bank stressed at the time that consumer spending is not keeping pace with real household disposable incomes. At the same time, housing saving rate remains buoyant at 15.3%.
All this makes for a positive, though still very cautious, outlook with so many factors converging at once. Much of this is because it has consciously chosen to pursue a data-dependent, meeting-by-meeting course of monetary policy going forward.
“The euro area economy has been building up some resilience against global shocks, but the outlook for growth has deteriorated owing to rising trade tensions.” – ECB President Lagarde
On Thursday, the US Dollar took flight on a hawkish boost, breaking free with impressive force. This undermined this strength enough to reverse the EUR/USD currency pair back towards the 1.1350 area. Market participants are scrambling to digest an ECB in full reactive mode as well as large economic surprises. These policy moves are already roiling currency markets as investors continue to adjust.
Along with what the ECB did, we have seen financial markets rattled by events in the cryptocurrency financial world. Overall cryptocurrency market cap fell by 18.6% during that time. This drop erased $633.5 billion since the market’s high watermark on January 18. This reversal brings to light the highly speculative nature of such digital assets and their impact on broader market sentiment.
Looking forward, the ECB finds itself in a difficult environment with unprecedented uncertainty. The central bank has indicated a preference to tread this new landscape lightly, avoiding heavy-handedness and keeping options open in terms of its monetary policy response.