The ECB unloaded a significant stimulus package Thursday: lower interest rates; EUR20 billion ($22.3 billion) a month more in asset purchases and a fresh batch of cheap, four-year loans.
The measures, which initially led to a rise in equity markets and weakened the euro–though these movements later reversed–could put pressure on other central bank Europe outside the eurozone to follow suit with easing steps.
But not yet.
Typically, expansionary monetary policies weaken an economy’s currency. Countries outside the euro, including Switzerland, Denmark and Sweden, are very sensitive to exchange rates, so a weaker euro puts pressure on those central banks to do more as well.
Here are some of the main implications:
The Swiss National Bank is probably the most sensitive among non-euro European countries to ECB policy, given its trade and financial links. One positive from Thursday’s decision, analysts said, is that the ECB only cut its deposit rate by 10 basis points to minus 0.4% and didn’t opt for a deeper cut or tiered system that could have weakened the euro further. The euro fetched 1.0983 versus the Swiss franc after the ECB meeting and news conference, little changed on the day.
“In general (the ECB’s action) puts pressure on other central banks,” said Karsten Junius, economist at Swiss bank J. Safra Sarasin. “But the way the ECB designed the program is geared toward the domestic economy” and not through the exchange rate, he said, “so it is not necessarily triggering an SNB reaction.”
He doesn’t expect any reduction in the SNB’s minus 0.75% deposit rate when the bank meets March 17.
Analysts at Credit Suisse echoed that view. “With the (ECB) lowering its deposit rate by 10 basis points to minus 0.40%, as widely expected, the pressure on the Swiss National Bank to cut its own deposit rate on 17 March at its regular quarterly policy assessment meeting has dropped,” they wrote.
If the ECB’s beefed up asset purchases put upward pressure on the franc, the SNB’s response would probably be to intervene in markets by purchasing foreign currencies, they added.
Still, the ECB’s aggressive action could add to doubts about the SNB’s resolve in the face of declining consumer prices and a weakening economy. “National banks see themselves as instruments responsible for their countries. But they are taking a strong approach,” said Nick Hayek, chief executive of Swatch Group AG, at a news conference on Thursday in Biel, Switzerland, before the ECB’s announcement. “Our national bank seems a bit lost, what will happen if there’s more pressure?”
The Riksbank is seeking to slow a rise in the national currency against the euro as it seeks to end four years of sub-target inflation. The bank acted pre-emptively in February, lowering its main rate to a record low of minus 0.5%.
The bank saw its policy vindicated on Thursday as the euro bounced back against the Swedish currency as ECB President Mario Draghi lowered expectations for further ECB rate reductions. The euro’s value in kronor ended the afternoon roughly where it had started.
The Danish central bank responded promptly to Frankfurt’s moves on Thursday with a statement saying policy would remain unchanged for now.
Denmark has a long-standing peg to the euro which it relies on to keep inflation low and steady and to create stable conditions for exporters to the eurozone.
The Danish central bank has been active in currency markets over recent months to steady the national currency’s value and said it judged that these recent interventions were sufficient for now.
That leaves the Danish deposit rate at minus 0.65%, just shy of the record low minus 0.75% where it spent much of last year.