LONDON, June 6 The European Central Bank's rate
cuts and new bank-lending programme have broad implications for
other central banks in Europe seeking to steer non-euro
With its main interest rate at just 0.15 percent and
negative rates on overnight deposits, the ECB's action is likely
to spur more euro-funded carry trades - where investors borrow
in a cheaper currency to buy a higher-yielding one.
Here is a look at what may go on along the euro zone's
One currency that could steal the limelight in carry trades
is the British pound. The euro fell to an 18-month low against
the pound of 80.64 pence on Thursday and speculators in the
options market are betting that the pair is likely to weaken in
Amongst the big four central banks - ECB, Bank of England,
U.S. Federal Reserve and Bank of Japan - investors expect the
BoE to be the first to raise interest rates from near zero
Combined - and with the pound as one of the world's most
liquid currencies - this suggests that large investors are
likely to buy sterling against the euro.
The ECB moves are expected to make Switzerland relatively
more attractive as a destination for money, potentially
challenging the Swiss National Bank's 1.20 per euro cap on the
The SNB capped the franc after investors fleeing the euro
zone debt crisis bid the safe-haven unit up to record levels. It
has not had to defend the limit by selling francs in more than a
But the franc is trading near a one-month high against the
euro at 1.2171 francs per euro, with near-term options pricing
indicating speculators are increasingly biased towards more
franc strength in the coming few weeks.
The ECB's move has raised pressure on Sweden to cut rates as
early as July.
The Swedish economy unexpectedly contracted in the first
quarter and the government is already concerned that a firming
crown, a likely outcome of an increased rate differential with
the euro zone, would thwart the still fragile recovery,
particularly in its vital export sector.
Finance Minister Anders Borg said after the ECB move that
the crown was too strong, adding "Now that the ECB (has gone)
ahead with wide, unconventional measures, it is important to
send signals that we do not consider it justified for the
exchange rate to strengthen."
The Danish central bank has had a policy for most of the
euro zone's lifetime of matching what the ECB does rate-wise.
But it held rates steady this time and appears little influenced
by the ECB's move for now.
The correlation between the two benchmark rates was broken
when it hiked this spring and the bank is expected to keep its
focus on the national currency rather than the euro for a while.
Jan Storup Nielsen, senior analyst at Nordea, said the
crown had been considered a bit too weak recently so the central
bank would have been pleased that the ECB moves strengthened it
Norway's crown is more detached from the euro than many of
the adjacent currencies because of its dollar-based oil export
As a result, the central Norges Bank will not be under any
immediate pressure to cut, especially as that would further fuel
an already overvalued property market.
But the bank has already warned that international rates are
lower than it saw just months ago and analysts said this may
force the bank to pare back its expectations on when it will
The zloty has gained nearly 2 percent versus the euro over
the past three weeks because of the diverging interest rate
paths in Poland and the euro zone.
The National Bank of Poland is reluctant to cut rates and
has said it will keep them on hold at the current 2.50 percent
until the end of the third quarter of this year.
This means, however, that Poland now has one of the highest
benchmark rates in the region, with Hungary (which has been
cutting) at 2.40 percent, the Czech Republic's rate at almost
zero and the euro zone now at 0.15 percent.
NBP Governor Marek Belka said a week before the ECB move
that a rate cut was "a low probability", but his language was
less stridently opposed than it has been.
The Hungarian central bank has cut its rates every month
since August 2012, so the ECB's loose stance could encourage it
The main rate is still at 2.4 percent so the differential
remains highly supportive.
The Czech central bank's commitment to keep the crown from
firming above the 27 per euro level - an effective floor - at
least into early 2015, meant that there was no immediate
movement of any note after the ECB move.
The crown remains inside a narrow band, suggesting the
market is taking the central bank at its word that it will step
in if it has to. The central bank has not physically intervened
in the market since an initial round last November.
(Reporting by Anirban Nag, Alice Baghdjian, Balazs Koranyi,
Marcin Goettig, Sandor Peto and Jan Lopatka. Writing by Jeremy
Gaunt; Editing by Susan Fenton)