ECB Cuts Interest Rates 25 Basis Points

Euro remains high in forex trading against the U.S. dollar

The European Central Bank cut interest rates today in a way that was both expected and unexpected. A rate cut by the ECB was expected. It has been increasingly clear that euro zone leaders need to do something to help in terms of economic stimulus. The unexpectedness came in the form of the 25 basis point cut. Many analysts expected the ECB to cut rates to 1%, which would have been a 50 point cut.

Clearly, euro zone leaders remain hawkishly optimistic about inflation, and are reluctant to make large cuts. Additionally, this smaller cut, to 1.25%, could be an indicator that euro zone leaders probably consider their floor to be 1%. A small 25 point cut this time leaves room for the ECB to cut again later if adequate economic progress is not seen.

The euro has been higher today in forex trading on the news. Even though plans for quantitative easing have not been revealed, there is a feeling that the ECB will soon have no choice. The currency market is responding to two ideas seemingly in conflict:

1. The fact that the ECB is slow with rate cuts, and that the euro zone is leading in terms of yield against the dollar, pound and yen.
2. The idea that euro zone leaders will have to become more aggressive in terms of economic stimulus at some point.