The euro closed in on its 2013 high today after the European Central Bank took no policy action despite widespread speculation that the bank would add liquidity to the financial system by ending its weekly sterilization of sovereign bonds purchases.
The ECB kept it main refinance rate unchanged at 0.25 percent and its deposit rate at zero. And in a moderately surprising move, worth about 75 points in 15 minutes and almost double that bottom to top for the euro, the ECB elected to keep its weekly withdrawal of 175 billion euro intact.
"The suspension of sterilization ... is one of the instruments that is in our list but we didn't see any development in the money markets that would lead to that unwanted tightening of monetary conditions that would justify the use of this instrument," Draghi said at this news conference following the policy announcement.
The possibility that the bank would cease rolling over the amount of its sovereign bond portfolio had been the subject of considerable media speculation, including a Reuter’s article that said the end of the program would be unanimously approved.
The Bundesbank, the German central bank had indicated its approval, in lieu of a charge for commercial deposits, also called negative interest rates, at the central bank
In fact the euro top today, 1.3873, is its highest against the dollar in almost two and a half years, since October 31,2011, if you discount the 15 minute 70 point spike to 1.3893 last December 27th.
Except for a seven session run from October 21st to October 31, 2011, the euro has not been sustained above 1.3900 since the March to September 2011 period, when it reached 1.4940 on May 4th of that year.
Mr. Draghi said last month that the ECB’s forecast on growth and inflation would help decide future monetary policy. Recent EMU data has upheld what Mr. Draghi has been saying, that there would be a gradual recovery in GDP and an upturn in prices, reaching, and the bank predicts 1.7% a year in two years.
Statistics have provided just enough confirmation of this forecast to enable the bank to stand pat and avoid any of the extraordinary measures, that it and the Bundesbank find so distasteful,
Euro strength is likely to continue now that further ECB easing measures have been obviated, at least for the time being.
A strong euro is a mixed issue. One the one hand it makes life more difficult for European exporters. Not primarily the high value goods from Germany and to a lesser extent France and Italy, but for the countries like Spain, Portugal, and Greece whose economies were more seriously damaged by the European debt crisis. But for European consumers whose buying power and consumption it augments, it is a benefit.
Unless the European economy relapses or the U.S. unexpectedly accelerates, central bank policy on either side of the Atlantic is likely to support the euro for the immediate future.
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