ECB Surprise Rate Cut: How Will it Affect Canada?

ECB Surprise Rate Cut

In an unexpected move, the European Central Bank (ECB) has cut its central Overnight Lending Rate to a historically low 0.05 per cent, and have announced new economic stimulus measures to come. This is due to efforts to keep low inflation from derailing Europe’s economic recovery and to add liquidity to the EU financial system, which will encourage lending. This is the second time since June that the ECB has cut rates in hopes it will improve economic strength and borrowing conditions.

These new developments are significant for Canada as Europe is our largest trading partner; in fact, our nation has increased trade activity with them by 40 per cent over last year alone. This recent rate decision could be a boon for Canadian businesses – here’s a look at how.

A Much-Needed Kickstart

EU countries have suffered since the 2008 financial crisis. Despite bold austerity measures and heavy bailouts, nations such as Greece, Spain and Ireland are still struggling to survive. This is the main driver behind the ECB’s focus to keep rates and borrowing costs low. According to BBC Business Editor Robert Peston, the move can be described as “a last roll of the dice”. “The European Central Bank has now almost exhausted its ammunition for preventing the Eurozone sliding into a devastating deflationary, contractionary spiral,” he stated. If the ECB were to ignore the warning that the continent could slip into a deep recession, Canada’s trade would be threatened.

Further Measures a Possibility

The ECB may be running out of options, but there is one possible fix up their sleeve: they may still announce taking quantitative easing measures as the U.S. did post-recession. QE refers to a program that buyers back government bonds in order to keep their yields low, and the fixed cost of borrowing at cheap levels.

Also read: How Bond Yields Affect Fixed Mortgage Rates>

This bond buying program was instrumental in restarting the U.S. economy after its devastating housing crisis and subsequent financial meltdown, so it’s certainly on the table for the EBC. Central bank president Mario Draghi has stated the measure has been discussed: “”Some of our governing council members were in favour of doing more than I’ve just presented, and some were in favour of doing less.”

Also read: The U.S. Fed Tapering Has Started… Now What?>

How Will This Impact Canadian and EU Trade?

With the Canada Europe Free Trade (CETA) made last year between Canada and the 28 E.U. nations, our economy should expect a $12-billion boost in activity in two years’ time. Despite the issues that continue to plague the continent, there are still many positive reasons for Canada. EU Growth is fractured.  Germany, for example is doing much better than Portugal, but this creates a unique opportunity for all types of businesses. Canada can focus on the countries with better economic prospects, and therefore increase business activity there.

 

 

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