ECB rates set to remain at historic lows

ECB interest rates will be kept at their current historic low levels of 1% well into the second half of the year.

Weaknesses across the euro economies have kept inflation low and the ECB will leave rates unchanged as a result, according to Bloxham Stockbrokers economist Alan McQuaid, who said no change in rates is likely before September/ October. ECB rates last peaked at 4.25% in July 2008, when the ECB raised rates to curb the ongoing threat of inflation.

They were cut by 0.5% in October as fears over recession replaced inflationary concerns and rates have been cut consistently as the global recession has taken hold.

The ECB cut rates to 1% in May 2009 and they have been held at that historic low point since then.

In the US Mr McQuaid says that despite the surprise 25bps increase in the US discount rate on February 18 to 0.75%, “we don’t expect any immediate change in the key Fed funds rate”.

With inflation still subdued and the unemployment rate uncomfortably high at 9.7%, the Federal Reserve is likely to hold off until the summer at least before contemplating raising its main interest rate, he said. “And even then, any tightening of monetary policy this year is likely to be relatively small,” he said.

He added that recent comments from the ECB suggest officials believe there is no reason to change official interest rates, given the absence of any inflation risk in the eurozone at present, he said. Despite persistent concerns over the global economy, Mr McQuaid said “a healthy global expansion is under way, but it will take time to reduce economic slack and repair damaged balanced sheets”.

With uncertainty still circling the global outlook McQuaid expects investors to consolidate gains made in recent months.

The eurozone’s fiscal woes have “spooked investors”, boosting bullish dollar positions in the options market well into the next 12 months, he said.

Given current market sentiment he sees further dollar appreciation to $1.30 being on the cards against the euro. The Canadian dollar may be attractive to investors looking for a safe home.

Russia’s central bank deputy chairman Alexei Ulyukayev said some reserves would be put into Canadian deposits and bonds. “Moscow’s confidence is well-placed in our view. With its domestic economy on the up and no impediments to its international trade relations, Canada’s currency looks set for further appreciation,” said Mr McQuaid.