- European Union's Finance Minister opposed ECB's negative rates policy in a confidential meeting.
- Negative rates have started to hurt the savings and pensions systems.
- Monetary policy’s banking transmission channels may also be threatened.
- Fabio Panetta says the benefits of low-rates policy outweigh the risks for now.
- Forex market has not responded lucratively to the recent proceedings at the ECB.
President Trump has reiterated his support for the European Central Bank’s (ECB) negative rates policy on multiple occasions. Following the third rate cut by the U.S Federal Reserve in 2019, Trump had also criticized Chairman Jerome Powell for not reducing rates to zero as he pointed at its potential benefits for the U.S economy at large.
Negative Rates Have Started To Hurt The Savings And Pension Systems
The same strategy, however, appears not to relish the same support in Europe. In a confidential meeting, European Union’s finance ministers have recently opposed ECB’s stance regarding the long-held leniency in the monetary policy. As per the sources, the ministers have opinionated that the negative rates have started to hurt the savings and pensions system with the potential for further worsening if the ECB doesn’t revise its policy in the near future.
Pablo Hernandez De Cos, Governing Council member at the ECB, stated earlier on Tuesday, that stretching the monetary leniency any further jeopardizes the union’s financial stability as it fuels risk-taking. He further added that monetary policy’s banking transmission channels may also be threatened if the European Central Bank chooses to sustain the reduced interest rates in the upcoming weeks. Hernandez highlighted in his statement that the September stimulus package is primarily directed at meeting the inflation objective.
Pablo’s perspective, however, is not shared by Fabio Panetta, Governing Council Nominee for the ECB. In his address to the European parliament earlier on Tuesday, Panetta appreciated the importance of keeping the unintended consequences of the low-rate monetary policy in check. But he further highlighted that at the moment, the benefits being extracted from the ECB’s policy evidently outweigh the potential risks. According to the Governing Council Nominee, it should be in the EU’s mandate to be flexible in using its instruments.
Response In The Forex Market
Analysis of the charts represents that the forex market has chosen not to respond aggressively to the lack of consensus among the ECB’s council members and the EU finance ministers. Following the drop in the U.S dollar index below the crucial 98.00 mark as ISM announced the U.S factory activity to have unexpectedly fallen in November, Eur/Usd has remained upbeat. Currently trading at around 1.1080, the pair seems poised to challenge the long-held resistance at 1.1100 level.
On the downside, 1.0990 continues to mark strong support for Eur/Usd. Despite the positive economic data from Germany last week, experts recommend caution as the slowdown on a macro level appears to be more prominent in Europe. The currency pair is also sensitive to the U.S – China trade complications, the UK’s upcoming general election, and the events of Brexit at large.