ECB cuts interest rates

At a time when talk in the UK is of when interest rates will rise, the European Central Bank (ECB) caught markets on the hop with cuts to its three main interest rates. The headline rate was lowered to 0.05% and the deposit rate to -0.2%. The Bank of England meanwhile left rates unchanged again this month.

More significant than the rate cuts, is that the ECB is now engaging for the first time in a form of quantitative easing (QE). This QE will involve the purchase of asset backed securities (private sector bonds), rather than government bonds, but as the president of the ECB, Mario Draghi, announced, this bond-purchase initiative represents a break with the ECB's history.

To some extent, this is simply delaying the inevitable – ie the use of full QE – given that the eurozone is showing no growth and there is the risk of deflation. It could be that the Germans are resistant to the idea of full QE, but Draghi did intimate that the ECB's board was agreed that this option should be explored and developed.

The immediate upshot of all this was that European stock markets rose, whilst the euro fell to its lowest level in over a year. From an investor’s perspective, whilst most European economies are weak, there are still many strong European companies that are doing well. Share prices are depressed due to poor market sentiment, so there are opportunities out there to invest in undervalued companies or via a European fund.

This is obviously a general comment on the market situation and not a recommendation to invest. Should it be of interest, it could however be worth discussing with your financial adviser, to see whether it makes sense in terms of your particular needs and investment objectives.

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