ECB cut the rate and Czech Central Bank FX intervention

ECB's Draghi explains his "All-in' Rate-Cut move

ECB likes to surprise at every conference of President Draghi, on the market is happening a lot - volatility :) It was no different this time. The European Central Bank surprised everyone by making the interest rate cut at today's meeting. This decision was said, but in the context of the December meeting.

The economic recovery in the euro area remains at risk, lending is at a low level, and inflation remains low - the reasons for the decision of the ECB. In fact justification for cutting interest rates is logical, what is more, the ECB suggested that interest rates in Area remain unchanged or lower level for a long time. Thus, in theory, the decision is not a surprise, but hardly anyone expected it will cut right now. The ECB decided that there should hesitate to take decisions and effectively terminated its key interest rate today.

ECB Monetary policy decisions

The most important expression:

- euro area growth risks remain `On the downside',

- Rates may be even lower!, as the european economy it needs to,
- euro area inflation risks are `broadly balanced' - ECB sees no risk of deflation in the euro zone,

- growth in loans remains weak,
- market conditions potentially negative for economy,

- The current LTRO extended until the end of June 2015!
- unemplyment remains high,
- euro area may face prolonged period of low inflation,

- We discussed a reduction in the deposit rate, we are technically ready for its introduction, we want to leave behind the more part of the instruments (!),

- The most important monetary aggregates show a weakness in lending; aggregate M3 is supported only by the sizable inflow of foreign capital to Euro area.

Market rumor: Approximately 25% of the members of the ECB against rate cut today.

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Czech Republic enters currency wars with first FX intervention in 11 years.

- Koruna weakens 4.67% VS EUR as Central Bank oks intervention
- Czech Central Bank said to buy Euros in market

Some more from Bloomberg:

- Czech central bank board approves start of currency interventions at monetary-policy meeting today, bank says in statement on its website,

- Bank says will intervene to keep koruna to near 27/EUR in statement announcing decision,
- Bmark 2-wk repo rate left at what bank calls “technical zero” of 0.05%,
- All 19 analysts in Bloomberg survey forecast bmark interest rate will be kept unchanged.

The history of the settings of the main instruments of monetary policy and the Bank Board minutes are available at: 

link 1 - The main instruments of monetary policy

link 2 - CNB Board decisions

Official note: 

The CNB Bank Board decided at its meeting today to keep interest rates unchanged. The two-week repo rate was maintained at 0.05%, the discount rate at 0.05% and the Lombard rate at 0.25%.

Repo rate: The CNB’s key monetary policy rate, paid on commercial banks’ excess liquidity as withdrawn by the CNB in two-week repo tenders.

Discount rate: A monetary policy rate which as a rule represents the floor for short-term money market interest rates. The CNB applies it to the excess liquidity which banks deposit with the CNB overnight under the deposit facility.

Lombard rate: A monetary policy interest rate which provides a ceiling for short-term interest rates on the money market. The CNB applies it to the liquidity which it provides to banks overnight under the lending facility.

regards,

oscarjp