Exchange rates and interest rates
Data extracted in April 2018.
Planned article update: April 2019.
Exchange rates against the euro, 2007-2017
This article presents an analysis of exchange rates and interest rates; which are some of Eurostat’s most frequently updated statistics. It is important to note that practically all of Eurostat’s data in monetary terms are denominated in euro (including statistics for European Union (EU) Member States that are not part of the euro area and data for non-member countries). This information is derived by converting from data in national currencies to data in euro (EUR — see currency codes). As such, for most of the statistics that are released by Eurostat, it is necessary to bear in mind the possible effect of currency fluctuations when making comparisons across countries for indicators denominated in euro terms, in particular when analysing time series.
This article starts by considering the development of exchange rates across the EU, as well as exchange rate fluctuations between the euro and several currencies of non-member countries, in particular the United States dollar, Chinese renminbi-yuan, Japanese yen and Swiss franc (all of which are important reserve currencies). The second half of the article examines interest rates — in other words, the cost of lending/borrowing money. At the macroeconomic level, key interest rates are generally set by central banks, as a primary tool for monetary policy with the goal of maintaining price stability and controlling inflation.
Table 1 shows the annual average exchange rates between the euro and a selection of European currencies, as well as the Japanese yen and the United States dollar between 2007 and 2017. The development of these exchange rates is also shown in the four different charts that make up Figure 1, where the currencies are grouped together according to the magnitude of their various exchange rates against the euro; note that the exchange rates for currencies of EU Member States that do not use the euro are shown in different shades of blue. Among these, non-euro area members may fix their exchange rates against the euro as part of the exchange rate mechanism (ERM II) in preparation for joining the euro area and this explains some of the very stable euro exchange rates: Denmark is the only current member of ERM II.
Focusing on the exchange rates of non-euro area Member States, between 2007 and 2017, the euro appreciated most strongly against the Romanian leu (27.0 %). Although the euro had appreciated quite strongly against the pound sterling between 2007 and 2009 it subsequently depreciated, particularly in 2012, 2014, 2015 and the first half of 2016, although this pattern was reversed during the second half of the year (following the Brexit vote) as the euro once again appreciated. Over the whole period shown in Figure 1 the euro appreciated by 21.9 % against the pound sterling. The euro also appreciated by more than 10 % against the Hungarian forint and the Polish zloty. Throughout the period 2007-2017 there were relatively small fluctuations in the exchange rates between the euro and currencies of Sweden, Croatia, Bulgaria and Denmark, with the overall change no greater than 5 % during the period under consideration. By contrast, the euro depreciated against the Czech koruna between 2007 and 2011, before appreciating between 2011 and 2014, and then subsequently depreciating once more during the period from 2015 to 2017, such that over the whole period the euro depreciated by 5.2 %.
Figure 1 also shows the development of the euro against a number of European currencies of non-member countries. Between 2007 and 2009, the euro appreciated strongly against the Icelandic króna (which was particularly impacted by events linked to the global financial and economic crisis) before depreciating thereafter — initially at a relatively gradual pace — aside from an appreciation in 2013; by 2017 the euro was 27.3 % higher against the Icelandic króna than it had been in 2007. The euro also appreciated strongly, but with a more regular development, against the currencies of Turkey (appreciating by 56.6 % between 2007 and 2017) and Serbia (34.1 %). The latest developments (for 2017) suggest a change in these patterns, as the value of the euro against the Turkish lira appreciated more rapidly while there was a modest depreciation in the value of the euro against the Serbian dinar. A similar but weaker development to that observed for Serbia was witnessed for the Albanian lek: the euro initially appreciated in value but after a relatively stable exchange rate for several years, this pattern was reversed as the value of the euro depreciated in both 2016 and 2017. Nevertheless, this resulted in an overall appreciation for the euro of 7.8 % between 2007 and 2017. Developments against the Norwegian krone were less regular, with the euro appreciating slightly in 2008 and 2009, before depreciating for three consecutive years and then appreciating again for five consecutive years to finish with an overall appreciation of 14.1 % between 2007 and 2017. During the years shown in Figure 1 there was little movement in the exchange rate between the euro and the denar of the former Yugoslav Republic of Macedonia; the denar has been pegged against the euro since 2002 with the goal of achieving price stability.
Figure 1 also shows exchange rate developments for three reserve currencies, those of the United States, China, Japan and Switzerland. The euro appreciated by 6.8 % against the United States dollar in 2008. Thereafter, the exchange rate remained relatively unchanged — the euro depreciating gradually — up until 2014. In 2015, there was a considerably sharper depreciation in the value of the euro against the United States dollar (-16.5 %), followed by relatively small fluctuations in 2016 and 2017; as a result, the euro depreciated by 17.6 % against the dollar between 2007 and 2017. There were several years of marked depreciation in the value of the euro compared with the Chinese renminbi-yuan during the period 2009-2015, interrupted by a few smaller appreciations (2011, 2013 and 2014). However, in the most recent years for which data are available, 2016 and 2017, the euro appreciated relatively strongly against the renminbi-yuan. There was a marked depreciation in the value of the euro compared with the Japanese yen during the period 2007-2012. The euro appreciated again between 2012 and 2014. However, there were further depreciations in the value of the euro against the yen in 2015 and particularly in 2016, followed by a modest appreciation the year after, such that overall between 2007 and 2017 the euro depreciated by 21.4 % against the yen. The euro depreciated at a rapid pace against the Swiss franc between 2007 and 2011, with a period of relative stability between 2011 and 2014. This resulted from the Swiss central bank introducing a minimum exchange rate of CHF 1.20 = EUR 1.00 in September 2011, effectively capping the Swiss franc’s appreciation. This minimum exchange rate was maintained until 15 January 2015: after its removal the Swiss franc appreciated 30 % in inter-day trading. The euro depreciated by 12.1 % in 2015 against the Swiss franc and despite a modest appreciation in the value of the euro in 2016 and 2017, between 2007 and 2017 the euro depreciated by 32.3 % overall against the Swiss franc.
The overall pattern in bond yields (see Figure 2) for the EU-28 (weighted) average was that yields were considerably lower in 2017 than they had been in 2012; the earlier of these two periods was characterised by yields having been relatively high in some of the EU Member States due to issues linked to the financing of their sovereign debt. In the EU-28, bond yields in 2012 (3.64 %) were almost three times as high as in 2017 (1.31 %), with the change for the euro area even greater, as bond yields in 2012 (3.86 %) were slightly more than 3.5 times as high as in 2017 (1.09 %). As such, bond yields in the EU-28 fell by 2.33 percentage points between 2012 and 2017, while the corresponding change for the euro area was 2.77 points.
Yields fell by more than 2.00 points in a majority of the EU Member States (no data available for Estonia) between 2012 and 2017, and in most of the other cases they fell by 1.00-2.00 points. There were three exceptions where they fell by less than 1.00 points: in the United Kingdom, bond yields fell from 1.74 % in 2012 to 1.18 % in 2017; in Denmark, they fell by from 1.40 % to 0.48 %, while in Sweden they fell from 1.59 % to 0.65 %.
Greece, Romania, Poland and Portugal were the only EU Member States to record bond yields that were above 3.00 % in 2017, while there were 19 Member States where yields were below 2.00 % (15 of which had yields below 1.00 %). The lowest yields in 2017 among the Member States were recorded in Denmark (0.48 %), Germany (0.32 %) and Lithuania (0.31 %). The largest reductions (in percentage point terms) in bond yields between 2012 and 2017 were recorded for Greece, Portugal and Ireland — all three of which were heavily impacted by the global financial and economic crisis — as historically high yields were reduced as the economic and financial situation stabilised.
Money market rates, also known as interbank rates, are interest rates used by banks for operations among themselves. In the money market, banks are able to trade their surpluses and deficits; Figures 3 and 4 show three-month interbank rates. In recent years, these rates peaked in 2007 or 2008 and subsequently fell at a rapid pace in 2009 as the effects of the global financial and economic crisis were felt; interbank rates generally continued to fall thereafter, although at a much more moderate pace. During the whole of the period 2012-2016, interbank rates for the euro area, the United Kingdom, Japan and the United States were consistently found within the range of -1.00 - +1.00 %; indeed, this was the case in Japan for the whole of the time series shown in Figure 3. Average short-term interest rates in the euro area turned negative (-0.02 %) in 2015 and this pattern was continued in 2016 and 2017 when the latest annual rate was -0.33 %. By contrast, there was an upturn in interbank rates in the United States, as rates rose for three consecutive years after 2014, climbing to reach 1.26 % in 2017.
Figure 4 shows the same rates in the same markets, but is supplemented by information pertaining to the EU Member States that are not in the euro area. Although the most substantial fall in money market rates was recorded in 2009, interbank rates were consistently higher in 2012 (compared with 2017) for each of these Member States. In the euro area, the interbank rate fell from 0.57 % in 2012 to below zero (-0.33 %) in 2017, while Sweden and Denmark also reported negative rates in 2017.The annual average of interbank rates in Japan was also just below zero (-0.02 %) in 2017, whereas the United States had a different development, insofar as it not only recorded a positive interest rate in 2017 (1.26 %), but this was also higher than the rate recorded in 2012 (0.43 %).
Figure 5 shows the euro yield curve between 2007 and 2017 for central government bonds with various years remaining to maturity. In line with the pattern seen in Figure 3, yields were relatively high just before the onset of the financial and economic crisis, in 2007 or 2008. Regardless of the time to maturity, yields in 2016 were at a historic low, as bonds with less than nine years to maturity had negative yields and bonds with 30 years to maturity offered a yield of just 0.94 %. This situation changed somewhat a year later as bond yields showed signs of an upturn: as a result, bonds with less than seven years to maturity in 2017 had negative yields, while bonds with 30 years to maturity offered a yield of 1.30 %.
Eurostat publishes a number of different data sets concerning exchange rates. Two main data sets can be distinguished, with statistics on:
- bilateral exchange rates between currencies, including some special conversion factors for countries that have adopted the euro;
- effective exchange rate indices.
Bilateral exchange rates are available with reference to the euro, although before 1999 they were given in relation to the European currency unit (ECU). The ECU ceased to exist on 1 January 1999 when it was replaced by the euro at an exchange rate of 1:1. From that date, the currencies of the euro area became subdivisions of the euro at irrevocably fixed rates of conversion. From 2009 onwards the official rate for the Icelandic króna (ISK) is shown for indicative purposes.
Daily exchange rates are available from 1974 onwards against a large number of currencies. These daily values are used to construct monthly and annual averages, which are based on business day rates; alternatively, month-end and year-end rates are also published.
Interest rates provide information on the cost or price of borrowing, or the gain from lending. Traditionally, interest rates are expressed in annual percentage terms, although the period for lending/borrowing can be anything from overnight to a period of many years. Different types of interest rates are distinguished either by the period of lending/borrowing involved, or by the parties involved in the transaction (business, consumers, governments or interbank operations).
Long-term interest rates are one of the convergence criteria for European economic and monetary union (EMU). In order to comply, EU Member States need to demonstrate an average nominal long-term interest rate that does not exceed by more than 2 percentage points that of, at most, the three best-performing Member States. Long-term interest rates are based upon central government bond yields (or comparable securities), taking into account differences in national definitions, on the secondary market, gross of tax, with a residual maturity of around 10 years.
Eurostat also publishes a number of short-term interest rates, with different maturities (overnight, 1 to 12 months). A yield curve, also known as the term structure of interest rates, represents the relationship between market remuneration (interest) rates and the remaining time to maturity of government bonds.
Source data for tables and graphs
Interest rates, inflation rates and exchange rates are highly linked: the interaction between these economic phenomena is often complicated by a range of additional factors such as levels of government debt, the sentiment of financial markets, terms of trade, political stability, and overall economic performance.
An exchange rate is the price or value of one currency in relation to another. Those countries with relatively stable and low inflation rates tend to display an appreciation in their currencies, as their purchasing power increases relative to other currencies, whereas higher inflation typically leads to a depreciation of the local currency. When the value of one currency appreciates against another, then that country’s exports become more expensive and its imports become cheaper.
Through using a common currency, the countries of the euro area have removed exchange rates and, therefore, hope to benefit from the elimination of currency exchange costs, lower transaction costs and the promotion of trade and investment resulting from the scale of the euro area market. Furthermore, the use of a single currency increases price transparency for consumers across the euro area.
All economic and monetary union participants are eligible to adopt the euro. Aside from demonstrating two years of exchange rate stability (via membership of ERM II), those EU Member States aiming to join the euro area also need to adhere to a number of additional criteria relating to interest rates, budget deficits, inflation rates, and debt-to-GDP ratios.
From 1 January 2002, notes and coins entered circulation in the euro area, as 12 EU Member States — Belgium, Germany, Ireland, Greece, Spain, France, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland — adopted the euro as their common currency. Slovenia subsequently joined the euro area at the start of 2007, and was followed by Cyprus and Malta on 1 January 2008, Slovakia on 1 January 2009, Estonia on 1 January 2011, Latvia on 1 January 2014 and Lithuania on 1 January 2015, bringing the total number of countries using the euro as their common currency to 19.
Central banks seek to exert influence over both inflation and exchange rates, through controlling monetary policy — their main tool for this purpose is the setting of key interest rates. In joining the euro, each EU Member State agrees to allow the European Central Bank (ECB) to act as an independent authority responsible for maintaining price stability through the implementation of monetary policy. As of 1999, the ECB started to set benchmark interest rates and manage the euro area’s foreign exchange reserves. The ECB has defined price stability as a year-on-year increase in the harmonised index of consumer prices (HICP) for the euro area below, but close to, 2 % over the medium term (see the article on consumer prices - inflation and comparative price levels). Monetary policy decisions are taken by the ECB’s governing council which meets every six weeks (formerly every month) to analyse and assess economic and monetary developments and the risks to price stability and thereafter to decide upon the appropriate level of key interest rates.
- Eurostatistics — Data for short-term economic analysis — Issue No 4/2018
- Exchange rates (t_ert), see:
- ECU/EUR exchange rates versus national currencies (tec00033)
- Euro/national currency exchange rates (teimf200)
- Real effective exchange rate - 42 trading partners (teimf250)
- Interest rates (t_irt), see:
- Euro yield curve by maturity (1, 5 and 10 years) (teimf060)
- EMU convergence criterion series - annual data (tec00097)
- Long term government bond yields (teimf050)
- Day-to-day money market interest rates (teimf100)
- 3-month-interest rate (teimf040)
- Short-term interest rates: Day-to-day money rates (tec00034)
- Short-term interest rates: three-month interbank rates (tec00035)
- Bilateral exchange rates (ert_bil)
- Effective exchange rate indices (ert_eff)
- Exchange rates - historical data (ert_h)
- Euro yield curves (irt_euryld)
- Long-term interest rates (irt_lt)
- Short-term interest rates (irt_st)
- Interest rates - historical data (irt_h)
- Bilateral exchange rates (ESMS metadata file — ert_bil_esms)
- Conversion factors for euro fixed series into euro/ECU (ESMS metadata file — ert_bil_conv_esms)
- Effective exchange rate indices (ESMS metadata file — ert_eff_esms)
- Euro yield curves (ESMS metadata file — irt_euryld_esms)
- Maastricht criterion interest rates (ESMS metadata file — irt_lt_mcby_esms)
- Government bond yields - 10 years' maturity (ESMS metadata file — irt_lt_gby10_esms)
- Short-term interest rates (ESMS metadata file — irt_st_esms)
- Regulation (EC) No 2866/98 of 31 December 1998 on the conversion rates between the euro and the currencies of the Member States adopting the euro