Wednesday, July 3, 2013

ECB reports on a quiet trading day

Today is the Fourth of July, so a very Happy Independence Day to all our friends from and in the USA.

It also happens to be ECB day, when the European Central Bank will announce its policy decisions and conduct its monthly press conference where Mario Draghi, President of the ECB, will explain policy decisions and answer questions.

The big one, of course, concerns whether or not the key refinancing interest rate in the Euro zone will be lowered. There is scope for this. The primary objective of the ECB is price stability, in other words the control of inflation, and it takes this requirement very seriously. Its aim is an inflation rate that is “close to, but not above, 2.0%”. Right now it stands at 1.6%.

However, it also has a role in the support of economic activity, with a particular focus on employment throughout the zone. And the situation here is not good. The average unemployment rate throughout the bloc of countries that use the Euro now stands at a record 12.1%. Recall the gloom that descended on the U.S. when the rate went above 10%?

SeƱor Draghi and his colleagues have been reducing the interest rate and it now stand at 0.5%, which is a record low. While there is room for another drop, of say 0.25%, the expectation in the market is that it will remain unchanged. We will know later today.

But here's the thing. Due to the holiday in the U.S., trading will be on the thin side. This means that any announcement from the ECB has the potential to create more multi-directional volatility than might otherwise be the case. Be careful out there.

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