ECB Drops Spread to 2008 Lows

The ECB slashes the lending-deposit rates spread to the lowest level since 2008 as an effort to lift emergency lending

Today’s dual rate cuts (-25 bps in the refinancing rate to 0.50% and -50 bps in the lending rate to 1.00%) reduce the spread between the lending rate and the deposit rate to 1.0% from 1.50%.

The spread between the lending (emergency) rate and the deposit rates — known as the corridor rate– is now at its lowest since 2008 (Oct, Nov & Dec 2008), a time when the ECB rushed to reduce the cost of emergency loans (and catch up with the Fed’s aggressive easing) at the peak of the global financial crisis.

The ECB’s rate cutting decision targets the economy, rather than liquidity conditions, reflecting the decline in Eurozone CPI to 33-month lows (the biggest monthly point-drop since July 2009), the dual contraction in Germany’s manufacturing and services sectors, the seventh quarterly growth contraction in Spain as well a new record unemployment rate of 26.7% in the Eurozone’s fourth largest economy.

Today’s decisions focus on the banking sector, while any measures aimed at shorting up assistance to small & medium enterprises (SMEs) are likely to be taken in next month’s governing council meeting, which coincides with staff quarterly projections. By then, it would be clearer whether German GDP growth had posted a second quarterly negative decline, following the -0.6% in Q4 2012.

Euro: More Inaction
We expect further weakness towards the 1.2920-30 territory following the fourth failed attempt to follow up above the all-important 100-day moving average. The consolidation between $1.2850 and $1.3200 will likely prevail as the weakening position of the Fed hawks counters the loosening of austerity rules. Any prolonged declines are likely to encounter buying pressure at the important 1.2850s—the trend support extending from the low of July 2012.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.