ECB Sees More Delay In Raising Rates
June 06 2019 - 4:44AM
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The European Central Bank now expects its interest rates to
remain unchanged for a longer period than forecast earlier as
downside risks to the euro area outlook intensify amid escalating
global trade tensions.
The Governing Council, led by ECB President Mario Draghi, left
the key interest rates unchanged after the policy session in the
Lithuanian capital of Vilnius, as expected.
The main refi rate is currently at a record low zero percent and
the deposit rate at -0.40 percent. The marginal lending facility
rate is at 0.25 percent.
Eurozone interest rates were raised last in July 2011 by 25
basis points.
The bank changed its forward guidance to reflect that it expects
any change to the interest rate only after the first half of next
year. Earlier, the bank expected rates to remain unchanged at least
through the end of this year. "The Governing Council now expects
the key ECB interest rates to remain at their present levels at
least through the first half of 2020, and in any case for as
long as necessary to ensure the continued sustained convergence of
inflation to levels that are below, but close to, 2 percent over
the medium term," the bank said. A mild change to the forward
guidance in March had suggested that the bank expects the first
interest rate hike since the financial crisis to take place in
2020. The latest wording has clarified the message. The ECB
reiterated that it will continue to reinvesting the proceeds from
maturing securities that it had acquired under its asset purchase
programme.
The bank unveiled the terms of its latest targeted longer-term
refinancing operations, or TLTRO-III, announced in March. The
Governing Council priced these longer term loans 10 basis points
above the average rate in the main refinancing operations. "For
banks whose eligible net lending exceeds a benchmark, the rate
applied in TLTRO III will be lower and can be as low as the average
interest rate on the deposit facility prevailing over the life of
the operation plus 10 basis points," the ECB said. The TLTRO-III is
set to start in September this year and end in March 2021, thus
with a maturity of two years.
The Governing Council, which is held its June policy session in
the Lithuanian capital Vilnius, will have Philip Lane on board as
the new ECB Chief Economist.
Lane has been dealt with a challenge, as soon as he started in
the new job, in the form of a sharp slowdown in the euro area
inflation.
Both headline inflation at 1.2 percent and core price growth at
0.8 percent in May are distant from the ECB's target of "below, but
close to 2 percent. The doubling of the quarterly growth rate to
0.4 percent in the first quarter, further easing in the jobless
rate and a strengthening in economic sentiment should have
comforted ECB policymakers slightly, boosting their hopes that
inflation is on track to hit the target.
However, risks from the intensifying trade tensions and the
Brexit uncertainty are likely to keep them on their toes. On the
domestic front, there are reasons for concern such as a slowdown in
manufacturing and weakening consumption, other than the slowing
inflation that signal slower growth in the second quarter.
Figures released earlier on Thursday confirmed that the
quarterly growth rate doubled to 0.4 percent in the first three
month of the year. Markets now expect the ECB to launch more
stimulus this year and a much speculated measure is a tiered
deposit rate that can partly reduce the burden of the cost banks
pay on the cash they park at the ECB.
However, ECB policymakers are wary of a tiered deposit rate as
they fear it could signal that interest rates are going to remain
low for a long time.
Draghi is set to present the latest set of macroeconomic
projections from the ECB staff following the policy announcement
and some economists expect further downgrade to the Eurozone growth
and inflation outlook.
Draghi will hold his customary post-decision press conference at
8.30 am ET.
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