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On 15 April, the euro fell below €1.08 to the dollar for the first time since May 2020 as the European Central Bank (ECB) opted to leave its key interest rate at -0.50 percent, where it has remained since 2014.
The euro has lost about 5 percent against the buck this year, adding to a loss of 6.9 percent last year.
The bank’s policy-setting committee agreed to maintain its plan to gradually reduce stimulus measures while inflation continues at a record pace.
Recent data reinforced the committee’s plan to cease buying bonds in this year’s third quarter, the group’s post-meeting statement said.
Despite its continued support for the bond market, the yield on the 10-year German bond rose .13 of a percentage point after the meeting.
Bond yields rise as investors sell out of bonds.
However, ECB president Christine Lagarde did note that “downside risks to growth have increased substantially as a result of the war in Ukraine” and spiking energy prices, at a press briefing following the group‘s meeting.
“The supply shock [caused] by the war implies a difficult trade-off for the [ECB’s] governing council, given weaker growth and higher inflation,” Goldman Sachs analysts wrote in a research note last week.
The ECB is likely to raise its interest rate in September, Goldman’s researchers added, but might boost it in July if inflation worsens by then.
The euro’s value slipped because investors “got ahead of themselves” and expected the bank to raise interest rates eight times by the end of next year, ING economist Carsten Brzeski told the Financial Times.
“Lagarde’s comments confirmed the rather gradual process of normalization,” he said.
Inflation rampaged at a record 7.5 percent in Europe last month. Although central banks in the U.K. and U.S. already are raising interest rates, the ECB has reaffirmed its plan to stop buying bonds before hiking its rates.
PUBLISHER’S NOTE: The ECB has a lingering case of Central Bankster Syndrome: waiting to raise interest rates for fear of damaging economic growth while inflation rages at a record pace, damaging economic growth.
TREND FORECAST: The ECB will raise interest rates this year but it has waited too long. Its rate hikes will be too small and too gradual to matter to inflation. The region’s economy will sink into our Top 2022 Trend of Dragflation, with prices rising and economic activity declining, in part due to the ECB’s failure to act in time.