EUR GBP Slumps After ECB Stimulus Comments

The EURGBP exchange rate was 0.45% lower on Thursday after the European Central Bank interest rate decision. The bank kept interest rates at zero but said they would start to purchase less bonds as part of the emergency pandemic stimulus program.

The EUR to GBP rate is trading around the 0.8540 level with the latest readings for German inflation and UK GDP out today.

European Central Bank slows bond purchases as inflation surges

The European Central Bank kept interest rates unchanged on Thursday but opted to slow down the pace of its bond purchases under its pandemic emergency purchase program.

The bank’s Governing Council voted to keep the interest rate on the ECB’s main refinancing operations at 0%.

“Based on a joint assessment of financing conditions and the inflation outlook, the Governing Council judges that favourable financing conditions can be maintained with a moderately lower pace of net asset purchases under the (PEPP) than in the previous two quarters,” the ECB said.

Markets had been anticipating the central bank’s latest policy decision for signs of an imminent unwinding of pandemic-related stimulus, against a backdrop of surging inflation and strong economic growth.

On inflation the bank said that rates would rise when inflation is stuck above 2% but also added: “This may also imply a transitory period in which inflation is moderately above target”.

The ECB’s Pandemic Emergency Purchase Programme was implemented in March 2020 to support the economy in the pandemic and is due to end in March 2022 at a potential total of 1.85 trillion euros.

The bank has kept some flexibility on the rate of reduction of the asset purchases for now.

ECB President Christine Lagarde said at the news conference that “the rebound phase in the eurozone economy is increasingly advanced,” leaving the eurozone on course to match its pre-pandemic levels by the end of the year.

But she also warned that there was, “some way to go before the damage from the pandemic is overcome,” referring to job losses and consumer activity.

BCC warns of UK growth slowdown

The British Chambers of Commerce has warned that the UK is set for a sharp growth slowdown.

The business group also warned there is also a “real danger” that the Government’s recent national insurance hike could further hamper the economic recovery.

The BCC slashed its previous forecast for GDP in the third quarter to 2.8% from 3.5% previously and said that supply chain disruption and hiring difficulties are stalling the reopening bounce in the country.

The BCC also said that GDP, which was 4.8% in the second quarter, would slow down to 1.6% in the fourth quarter.

Traders will get to decide for themselves as today will see another GDP update and that is expected to show a slowdown in growth over July, with most economists expecting a 0.5% increase, down from 1% in June.

Another reading of German inflation is also out today with a 0.1% increase to 3.9% expected.

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