Euro hits four-month high after ECB slashes interest rates to 2.5%, sixth rate reduction in nine months

The euro touched a four-month peak against the US dollar on Thursday, March 6, after the European Central Bank (ECB) cut interest rates for the sixth time in nine months, as expected, but revised higher its near-term inflation forecast.

The single European currency rose 0.5 per cent to $1.0848, after hitting a four-month high of $1.0854. The euro has gained 4.5 per cent this week, set for its biggest weekly jump since May 2009. Germany is ramping up spending, with a 500 billion euro ($540.90 billion) special fund sought for infrastructure and plans to increase defense investment shackled by rigid borrowing rules. 

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ECB interest rate cut impact on Euro

Hefty government spending, which can be supportive for growth overall, can also exacerbate price pressures. Measures of longer-term inflation in the euro zone have already surged from around 2.05 per cent early this week to 2.24 per cent by Thursday, an unusually large shift. The ECB has raised its inflation forecast to 2.3 per cent this year, above the 2.1 per cent seen three months ago.

For now, the attention is on Europe amid a Bund sell-off that saw the 10-year benchmark yield on Wednesday post its biggest daily rise in more than 25 years. A big focus for investors is the expected impact of Germany's huge spending plan on ECB monetary policy. ECB President Christine Lagarde, in a press conference, said the spending proposals would boost European growth.

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But she noted that the ECB needed to be "attentive, vigilant" and to understand how it was going to work. "What the timing will be, what the financing will be so that we can then draw the conclusions and appreciate how much it will contribute to growth and what impact it would have eventually on inflation," she said.

Across the Atlantic, the dollar index, which measures the greenback against six peers, was on a four-day losing streak on Thursday, falling to a four-month low. It was last down 0.4 per cent at 103.88. The euro’s jump puts it on track for the best weekly gain versus the greenback since 2020, following Germany’s and the European Union’s pledges to ramp up defense and infrastructure spending.

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