The European Central Bank (ECB) left its key interest rates unchanged, as widely expected, and eased its monetary policy stance further by pushing back its time frame for any rate hike by another six months to until 2020 at the earliest and boosted its stimulus measures by launching a new series of targeted longer-term refinancing operations to counter the impact of weaker-than-expected growth.
The ECB, which just took the first step toward normalizing its monetary policy stance in December by ending four years of bond purchases, said growth was unexpectedly sluggish in the final quarter of last year and is set to remain weak in the first half of 2019 due to a combination of global uncertainties, including the threat of protectionism, a possible disorderly Brexit and emerging market vulnerabilities, along with slower growth in Germany and Italy.
For the fourth time in a row, ECB staff slashed its forecasts for growth and inflation but expects the new round of monetary stimulus, along with continued reinvestments of its existing stock of bonds, to underpin economic activity and support the build-up of price pressures and inflation.
“In any event, the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner,” said ECB President Mario Draghi, whose term expires at the end of October.
Echoing the global shift toward easier monetary policy this year, Draghi said the ECB now expects to keep its key interest rates at their current level “at least through the end of 2019,” and in any case as long as necessary to ensure inflation rises towards its target.
Beginning in June last year, and confirmed as recently as in January, the ECB’s guidance for rates was they would be maintained “at least through the summer of 2019.”
The ECB began cutting its interest rates in November 2011 and reached the zero bound of interest rates in March 2016 when the benchmark refinancing rate was cut to the current level of 0 percent while the deposit rate was cut to minus 0.40 percent and the marginal lending rate to 0.25 percent.
That month the ECB followed the example of other major central banks, such as the Bank of Japan, the U.S. Federal Reserve, the Bank of England and Sweden’s Riksbank, by using large-scale asset purchases, known as quantitative easing, to push down long-term interest rates.
Under this program, the ECB has accumulated some 2.6 trillions euros of bonds, both sovereign and corporate bonds, and decided in December last year to wrap up this program, confident that economic growth was slowly recovering.
Prior to its asset purchase program, the ECB in June 2014 launched its first round of targeted longer-term refinancing operations, known as TLTRO I, which differs from regular short-term open market operations by providing funds to banks for periods of up to 4 years to stimulate bank lending.
The second round of TLTROs was then launched in March 2016 and the ECB is now launching a third round of 2-year longer-term financing operations, (TLTRO-III), which will start in September and end in March 2021.
As in the previous rounds, banks can borrow up to 30 percent of outstanding eligible loans to consumers and businesses at a rate that is lower than the ECB usually offers to ensure that lending conditions remain easy and the aim of the ECB’s monetary policy filters into the economy.
“Today’s monetary policy decisions were taken to ensure that inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium term,” said Draghi, adding the weak economic momentum is slowing the rise of inflation towards its target.
After hitting its target in the middle of 2018, inflation in the 19-nation euro zone began falling in November and hit 1.5 percent in February this year while growth has been weakening all year and hit an annual rate of only 1.1 percent in the fourth quarter of 2018.
In its latest projections, ECB staff lowered their growth forecast for 2019 to 1.1 percent from December’s forecast of 1.7 percent compared with 2018’s estimated growth of 1.9 percent.
Growth in 2020 is seen at 1.6 percent, down from 1.7 percent, while the forecast for 2021 growth was unchanged at 1.5 percent.
Inflation this year is seen averaging 1.2 percent, down from the previous forecast of 1.6 percent, and then 1.5 percent next year and 1.6 percent in 2021, still below the ECB’s target, and down from December’s forecast of 1.7 percent and 1.8 percent, respectively.
Draghi said there were signs some of the specific factors that dampened growth were starting to fade but incoming data remains weak, in particularly manufacturing, and the slowdown in external demand is turning out to be longer-lasting, suggesting a weaker outlook for growth.
“The risks surrounding the euro area growth outlook are still tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets,” Draghi said.
The euro, which has been falling steadily since April 2018, fell around 0.8 percent in the wake of the ECB’s decision to 1.12 per U.S. dollar, to be down 1.7 percent this year.
ECB holds rates but pushes back rate hike, adds loans