The European Central Bank’s (ECB) move to cut rates and add liquidity reverberated through global financial markets last week, pushing down the euro’s exchange rate and spurring expectations that it will extend investors’ current appetite for international risk.
The ECB’s easing comes at a delicate time for global markets.
Fighting in Iraq is threatening the country’s collapse and there are clear signs that U.K. rates will be raised sooner than expected. This has led to speculation that the Federal Reserve – which this week is expected to further reduce asset purchases – could also raise rates earlier than expected.
Without a fresh dose of liquidity in global financial markets by the ECB, investors’ nerves could be tested, with the Reserve Bank of New Zealand’s rate rise last week serving as a timely reminder that the days of ultra-low interest rates ultimately will come to an end.
But for now, the days of risk-on in global financial markets look to be extended, with the central banks of Serbia and Macedonia last week welcoming the ECB’s move as helping reduce global risks.
The Bank of Serbia, which cut its rate for the second time this year, said the ECB’s easing “should have a positive impact on liquidity in the international capital markets.”
The National Bank of the Republic of Macedonia, which maintained its rate, said the ECB rate cut had increased the spread between its own currency and the euro, “raising the attractiveness of the domestic currency.”
Through the first 25 weeks of this year, central banks have now cut their policy rates 26 times, or 11.6 percent of this year’s 225 decisions by the 90 central banks followed by Central Bank News.
This is essentially unchanged from 11.7 percent the previous week but up from 10.6 percent at the end of May and 9.6 percent at the end of April, showing how the global trend has shifted toward lower rather than higher interest rates as the global economy has performed weaker than expected.
