European Central Bank Meeting Update

Friday| May 03, 2013

Content
European Central Bank meeting update Impact and Outlook

Overview This months rally in gold prices above the $1900/oz mark is indicative of structural problems and difficulties at the global economic level. Investors flocked to gold as a safe-haven investment, leading it to touch all-time highs almost every-day. The recent (last 2-3 days) decline in gold prices is partly due to profit-booking at higher levels coupled with expectations of further stimulus measures by Federal Reserve Chairman Bern Bernanke at the Jackson Hole Symposium. On the back of these positive expectations, markets are witnessing a bit of stability, and further trend in the global financial markets would be based on the outcome of the decisions taken by the policymakers and central bankers at this symposium.

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European Central Bank Meeting Update

Friday| May 03, 2013

Recession woes, Shattering Unemployment and impending deflation all leads to interest rate cuts
The European Central bank (ECB) on Thursday May 02, 2013 slashed its interest rates by a quarter to new record lows of 0.5 percent from 0.75 percent earlier. It also held out the possibility of further policy action to set in motion the growth and bring Euro zone out of recession. ECB President Mario Draghi also indicated that the central bank is ready cut its deposit rate from the current zero percent into negative terrain which would charge banks for holding their money overnight. Such a move could encourage the

banks to lend out money into other higher-yielding assets rather than hold it at the ECB as start. Lower EU rates and talks of further possible ECB action may have serious implications for the value of the euro, which depreciated 0.9 percent on Thursday after the rate cut decision. Inflation witnessing a biggest monthly drop in over four years, to 1.2 percent in March has given the ECB room to trim interest rates. Further, EU unemployment rate hitting new highs in the month of March to 12.1 percent and contraction in the manufacturing PMI has increased worries over economic health of the nation.

EU Unemployment rate at all time high to 12.1%

The 27 member European Union unemployment rate rose to 12.1 percent in March 2013, the highest level since the single currency bloc was established in 2001. There was a sharp differences across member states, for instance, Germanys unemployment rate was among the

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lowest in the euro zone at 5.4 percent, while Spains soared to 26.7 percent. Among the EU

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European Central Bank Meeting Update

Friday| May 03, 2013

member states, the lowest unemployment rates were recorded in Austria (4.7 per cent), Germany (5.4 per cent), Luxembourg (5.7 per cent) and the highest in Greece (27.2 per cent in January), Spain (26.7 per cent) and Portugal (17.5 per cent). EU unemployment continues to trend above the jobless rate in the US, which was 7.6% last month, and Japan, which was 4.3% in February.

EU CPI near 3 years low in April 2013

Euro-zone annual inflation plunged to 33 months low at 1.2 percent in April 2013 from 1.7 percent in March, remaining consistent with the ECBs target of maintaining inflation rates below, but close to, 2 percent over the medium term. Inflation was as low as 1.1 percent in Euro zones biggest economy, Germany and is important to consider as it could lead to even lower ECB inflation.

Implications of Rate Cut

Interest rate cuts to lowest levels will although have access to the urgently needed liquidity to debt ridden countries like Italy and Spain, the cut would have negative effects in Germany, where low interest rates have fuelled sharp rise in home prices. Infact, Germany would need a higher interest rate because savings are currently losing value. An interest rate cut may prove beneficial to some exporters as it will help reduce the value of the Euro compared to dollar and other major currencies. Lower interest rates tend to make it less attractive to hold Euros and thereby pull down the exchange rate making European

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products cheaper.

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European Central Bank Meeting Update

Friday| May 03, 2013

Impact and Outlook

After the cut in the interest rates by the European Central Banks (ECB), the Euro currency depreciated around 0.9 percent in yesterdays trading session and touched an intra-day low of 1.3036 on Thursday. Spot gold and spot silver prices rose by 0.7 percent and 1.1 percent each respectively in yesterdays trade. Crude oil prices gained sharply by 3.3 percent and base metals pack traded on a mixed note. Cut in interest rates may infuse liquidity in the euro zone and raise concerns over rise in inflation. Further, cut in interest rate will lower bond yields and money will move into other interest free assets leading to rise in the commodity prices. However, sharp upside may be capped as fears of rise in inflation may weaken euro currency. Apart from the ECB rate cut, US Federal Reserve decision to continue with its $85 billion bond buying program will lead to optimistic global market sentiments. Additionally, with central banks over the globe continuing with its loose monetary policy will lead to fall in low yielding currency. Weakness in the DX will push prices of precious metals, base metals and crude oil in a positive zone.

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