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ECB’s Rate Cut Effects On Foreign Trade

Some countries fear there will be an increase in the value of their local currencies stemming from the European Central Bank’s new monetary policies, which took effect June 11. Higher currency value could affect their foreign trade, they contend. Thus far, however, the long-term impact from the ECB’s move into unchartered waters with a negative interest rate has yet to play itself out.

New monetary policies instituted by the European Central Bank (ECB), including a negative interest rate, reportedly could affect foreign trade with such countries as China and Israel because of the impact on the respective yuan and shekel exchange rates.

Europe’s central bank on June 5 cut its main refinancing rate by 10 basis points to a record low 0.15% and interest rate to -0.1%, effective June 11. It also reduced the marginal lending rate by 35 basis points to 0.4%.

Europe’s central bank imposed the negative deposit facility interest rate to encourage banks to put their money to work rebuilding the battered euro zone. It also hoped to weaken the euro by making exports more competitive. However, such a move has never before been tried on a large scale, so how it ultimately will affect markets remains to be seen.

If the central bank achieves its desired results, growth in the European economy could boost the region’s demand for Chinese commodities. However, if the exchange rate of the euro falls significantly, indicating the yuan is appreciating, the move could prove unfavorable to China’s exports, reports WantChina’sTimes.com.

“The negative interest rates may lead to a partial outflow of capital from the eurozone and its influx into China, where interest rates are higher,” Sun Huayu, vice director of the International Business School at Jinan University, said in the report. “If China’s central bank does not intervene, the current tight capital situation in the Chinese market can be relaxed.”

The ECB’s quantitative easing’s effect on China is relatively moderate for now, but it might boost liquidity in the global market and pressure exports and imports in the emerging market. Moreover, if the new measures trigger global economies to intervene in exchange rates, China would face a harsher challenge, the report notes.

In Israel, exporters reportedly reacted to the ECB’s interest-rate cuts by going on a media offensive against a strong shekel because it makes Israeli exports less price-competitive abroad, reports Haaretz.com. Technology companies launched their broadside offensive on June 8.

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