Swiss Franc Weakens After European Central Bank Cut Interest Rates
GBP/CHF has broken back through the 1.45 mark as it was announced last week that the European Central Bank would be cutting interest rates by 25 basis points to 0.5%.
The president of the European Central Bank, Mario Draghi, announced last Thursday that the ECB would be cutting the benchmark rate as the Eurozone continues to struggle with recession as unemployment rises and growth remains stagnant. The rate cut was widely expected as Draghi had been hinting at it for some time. As a result, the impact on the markets was muted as it had largely been priced in since rumours of the cut began circulating around a month ago. The last time the ECB cut rates, 10 months ago, the euro lost around three cents against the pound over two weeks. Conversely, the euro actually gained against sterling as news of the cut broke. However, the euro subsequently lost around a cent against the UK currency during Draghi’s post-meeting speech.
“The cut in interest rates should contribute to support prospects for a recovery later in the year,” Draghi said, while pledging monetary policy would remain accommodative. It’s hoped that the interest rate cut will help companies by lowering borrowing costs for the banks that have borrowed from the ECB, encouraging them to loan more. However, economists have warned that it will likely have little effect as the banks are not passing on the lower rates, particularly in indebted countries where help is most needed.
The Germans have expressed their discontent with the decision with Angela Merkel suggesting that the European Central Bank would actually have to raise interest rates if it were looking at Germany alone. German insurers and major players in its large banking sector also spoke up against looser monetary policy, saying it would undermine savings needed to protect its ageing population.
Over in Switzerland, the latest data indicated a small decline in currency reserves suggesting that pressure on the Franc is easing. This could lead to substantial outflows and there is also still some speculation that the national bank may consider raising the minimum euro level.
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