Why ECB must act to cut interest rates?
Markets are concerned
about low inflation in euro-zone which may force the European Central Bank
(ECB) to act as soon as April 3rd at its monetary policy meeting. During October 2013 when the inflation in the euro zone fell to 0.7% the ECB cut the interest rates to a record low of 0.25% to avoid getting the economy into deflation zone. As a result the euro weakened against the U.S. dollar…this scenario could be repeated tomorrow!
ECB should be concerned about lower inflation below its 2% target and taking the appropriate measures to fight deflation because demand will be decreased leads to lower production and higher unemployment rate and could hurt the already struggling economic growth in euro zone.
A decision of further monetary easing should be taken as euro negative and will increase demand for the U.S. dollar. While the ECB may opt for easing the U.S Federal Reserve is moving toward tightening and reducing monthly bonds and assets purchases. Consequently it will increase demand for U.S bonds and will lift the dollar against the euro. The main outlook of the single currency remains bearish because differentials in interest rates between euro zone and U.S. will be on the dollar side.
