Eyes Are On The Eurozone Cash Rate

by on September 1, 2013 7:01 am BST

Traders await anxiously for the European Central Bank’s policy and cash rate decision on September 5.  Policymaker Benoit Coeure told a Swedish newspaper on Saturday that the European Central Bank will be eying money market rates to ensure that do not get out of hand. Since Federal Reserve Chairman Ben Bernanke signaled potential monetary policy tightening, the eurozone money market rate have increased. Many market participants still believe a September taper is on the books, but the recent economic data out of the U.S. could postpone such policy decisions.

Another factor in the increased ares are that European banks are beginning to pay back long-term longs to the European Central bank that were taking out during the heart of the crisis. This reduction of excess liquidity is driving up rates.

Coeure said “we are watching this process closely and will make sure that money market rates remain at reasonable levels.” European banks took in a staggering one trillion euros in the form of three-year loans from the European Central Bank in two LTROs in December 2011 and February 2012. The first LTRO matures in 2015. However, nearly a quarter of the money has been returned under the option of early payment. He also mentioned “in the Euro zone, we are not in the position where we can begin normalizing monetary policy.”

They now have the option to repay the loans early and have returned almost a quarter of the money already.

There is a small light at the end of the tunnel as Germany and France pull the eurozone out of its longest recession in history as an increase in business activity picked up at a faster pace than expected.

Coeure still has a rather hawkish view, “as you know, the ECB’s Governing Council has unanimously said that rates are going to remain low, at the present level or lower, for an extended period of time.”

The most recent eurozone data does seem to be positive, but there are still striking discrepancies. The eurozone unemployment remained unchanged this month at 12.1 percent, while unemployment still remains insanely high in Spain and Greece, above 25 percent. Italy’s unemployment is near 12 percent, while Ireland’s is near 13.5 percent. High unemployment means that the consumer is hurting, and when the consumer hurts, the economy hurts. Only for much growth can be dependent on ex-eurozone factors.

The fact of the matter is Germany is growing, and that’s great! But, there are still poor growth expectations throughout the eurozone, and it is very likely the European Central Policy will remain very accommodative for the foreseeable future.