ECB cuts deposit rate to zero

Publication date: 6 July 2012
Author: Moneycorp

- BoE makes expected addition to QE

- US employment data today

The Education Secretary intends to shake up the teaching of literacy. He wants to improve the quality of students’ written work which, he believes, hs Bcum 2 sloppy n 2much lk SMS txt spk. The strategy includes an exam that will test 11-year-olds’ grasp of vocabulary, spelling, grammar and punctuation. It will include questions such as “Identify the proper noun in the sentence ‘Run John run’” and “Correctly place the apostrophes in ‘Apples £1.50/kg’ and ‘The does fawn fawns on other does fawns’”. Pupils who pass the exam will also get an A-level in English.

They will also probably be able to spot that “Bank prints more money” and “Sterling/euro points higher”, whilst refreshingly apostrophe-free, appear to be mutually incompatible. The two phrases are not, after all, usually seen together in public. But that’s the way it turned out yesterday.

As for the printing of money, the Bank of England ticked most investors’ boxes when it announced another £50bn of asset purchases to add to the £325bn of gilts already in its strong room. The pound inched higher on the unremarkable news. It was 45 minutes later that things really became interesting, when the European Central Bank said it would lower its benchmark Refinancing Rate. Of itself that was no big deal, but the ECB announced at the same time that it would cut to zero the rate of interest it pays on commercial banks’ deposits.

It will change banks’ attitudes to the “deposit facility”. If they place spare cash with the ECB for safe-keeping they will now receive no return at all. The intention is that banks will be more inclined to lend to customers, or at least to one another. The perception of investors is that the change will encourage banks with spare cash to switch it into higher-yielding currencies – and there are not many that yield less than zero.

The euro headed lower. By the end of the London session it had lost one and a half US cents, one yen and one cent against the pound. The commodity currencies were the main beneficiaries. But sterling had nothing to crow about either. Although it did well enough against the euro it was lower everywhere else.

If Thursday was interesting, this afternoon promises to be almost equally so. There is not much from Europe beyond Swiss inflation, UK producer prices and German industrial production but, being the first Friday of the month, today brings the Canadian employment data and that global megastat, US non-farm payrolls.

Non-farm payrolls are seen as the single most important indicator of international economic health. The stronger they are, the better the condition of the US economy and the greater the demand for the world’s goods and services. After a good run last year, when payrolls rose by an average of 153k a month, the average for the last two months is just 73k. The prediction for today is 90-95k and even that is not enough to keep pace with population growth.

So with rate cuts in Euroland (and China), asset purchases in Britain and slow employment growth in the States, investors will have to decide this afternoon which way to jump. Anyone who wants predictability would do well to complete their FX business before lunch. Have a good weekend.