ECB maintains rates as uncertainties dampen sentiment

April 10, 2019

By CentralBankNews.info
    The European Central Bank (ECB) maintained its key interest rates and guidance for rates to “remain at their present levels at least through the end of 2019” as economic data in the last month confirms growth remains sluggish while the persistence of geopolitical uncertainties, the threat of projectionism and vulnerabilities in emerging markets is dampening sentiment.
     The ECB, the central bank for the 19 members of the European Union (EU) that use the euro currency, also confirmed it will continue to invest principal payments from its stock of 2.6 trillion euros of securities “for an extended period of time past the date when we start raising the key ECB interest rates” along with its commitment of standing ready to adjust all monetary instruments to insure that inflation moves toward its target of close to, but below, 2 percent.
     Last month the ECB switched tack as weak economic activity in late 2018 was continuing this year by pushing back its time frame for any rate hike to 2020 from end-2019 and by launching a new series of targeted longer-term refinancing operations (TLTRO-III) as it believes “an ample degree of monetary accommodation remains necessary” to keep easy financing conditions and boost growth.
     The ECB began cutting interest rates in November 2011 and in June 2014 it launched the first round of TLTROs which differ from normal short-term market operations by providing low cost loans to banks for periods of up to 4 years. 
     By March 2016 the euro area economy and inflation continued to remain weak and the ECB then cut its benchmark refinancing rate 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 also began using large-scale asset purchases – known as quantitative easing – just as the Federal Reserve, the Bank of England, the Bank of Japan and Sweden’s Riksbank. In December 2018 the ECB took the first step toward normalizing its monetary policy by ending these bond purchases.
     ECB President Mario Draghi said details, including the pricing, of the third series of low-cost loans will be released at one of the next meetings of the ECB Governing Council and the central bank is also weighing whether the continuation of negative interest requires any measures to ease the side effects on banks’ abilities to lend to businesses.
    The latest round of cheap bank loans are planned to run for 2 years and begin in September and end in March 2021.

     Economic output in the euro area grew by only 1.1 percent year-on-year in the fourth quarter of last year, the 5th consecutive quarter of slowing momentum, and Draghi said incoming data continues to be weak, especially for the manufacturing sector due to the slowdown in external demand.

      “As the impact of these factors is turning out to be somewhat longer-lasting, the slower growth momentum is expected to extend into the current year,” Draghi said, adding the risks surrounding this outlook remain tilted to the downside.
      In an update to its forecast, the ECB in March lowered its forecast for the fourth time and now projects 2019 economic growth of 1.1 percent, down from 2018’s estimated growth of 1.9 percent, growth next year of 1.6 percent and 1.5 percent in 2021.
     Inflation remains below the ECB’s target and Draghi expects inflation to decline in coming months based on future prices of oil. In the medium term, the ECB expects underlying inflation to slowly rise, helped by its easy policy, continued economic growth and rising wages.
     Inflation in March eased to 1.4 percent in March from 1.5 percent in February and is forecast to average only 1.2 percent this year, then 1.5 percent next year and 1.6 percent in 2021.
     The euro has been depreciating slowly and steadily against the U.S. dollar since April last year and fell abut 0.4 percent following today’s policy decision to 1.123 to be down 0.8 percent this year.

      
     The European Central Bank released the following monetary policy decision, followed by the introductory statement to its press conference by President Mario Draghi:

“At today’s meeting the Governing Council of the European Central Bank (ECB) decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council expects the key ECB interest rates to remain at their present levels at least through the end of 2019, 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% over the medium term.
The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
The President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.”

Introductory statement by President Mario Draghi:
“Ladies and gentlemen, the Vice-President and I are very pleased to welcome you to our press conference. We will now report on the outcome of today’s meeting of the Governing Council.
Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at their present levels at least through the end of 2019, 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% over the medium term. 
We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme for an extended period of time past the date when we start raising the key ECB interest rates, and in any case for as long as necessary to maintain favourable liquidity conditions and an ample degree of monetary accommodation.
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.
Details on the precise terms of the new series of targeted longer-term refinancing operations (TLTROs) will be communicated at one of our forthcoming meetings. In particular, the pricing of the new TLTRO-III operations will take into account a thorough assessment of the bank-based transmission channel of monetary policy, as well as further developments in the economic outlook. In the context of our regular assessment, we will also consider whether the preservation of the favourable implications of negative interest rates for the economy requires the mitigation of their possible side effects, if any, on bank intermediation.
The information that has become available since the last Governing Council meeting in early March confirms slower growth momentum extending into the current year. While there are signs that some of the idiosyncratic domestic factors dampening growth are fading, global headwinds continue to weigh on euro area growth developments. The persistence of uncertainties, related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets, is leaving marks on economic sentiment. At the same time, further employment gains and rising wages continue to underpin the resilience of the domestic economy and gradually rising inflation pressures. However, an ample degree of monetary accommodation remains necessary to safeguard favourable financing conditions and support the economic expansion, and thus to ensure that inflation remains on a sustained path towards levels that are below, but close to, 2% over the medium term. Significant monetary policy stimulus is being provided by our forward guidance on the key ECB interest rates, reinforced by the reinvestments of the sizeable stock of acquired assets and the new series of TLTROs. 
Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP rose by 0.2%, quarter on quarter, in the fourth quarter of 2018, following an increase of 0.1% in the third quarter. Incoming data continue to be weak, especially for the manufacturing sector, mainly on account of the slowdown in external demand, which has been compounded by some country and sector-specific factors. As the impact of these factors is turning out to be somewhat longer-lasting, the slower growth momentum is expected to extend into the current year. Looking ahead, the effect of these adverse factors is expected to unwind. The euro area expansion will continue to be supported by favourable financing conditions, further employment gains and rising wages, and the ongoing – albeit somewhat slower – expansion in global activity.
The risks surrounding the euro area growth outlook remain tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets.
According to Eurostat’s flash estimate, euro area annual HICP inflation was 1.4% in March 2019, after 1.5% in February, reflecting mainly a decline in food, services and non-energy industrial goods price inflation. On the basis of current futures prices for oil, headline inflation is likely to decline over the coming months. Measures of underlying inflation remain generally muted, but labour cost pressures have strengthened and broadened amid high levels of capacity utilisation and tightening labour markets. Looking ahead, underlying inflation is expected to increase over the medium term, supported by our monetary policy measures, the ongoing economic expansion and rising wage growth.
Turning to the monetary analysis, broad money (M3) growth increased to 4.3% in February 2019, from 3.8% in January. Looking through some volatility in monthly flows, M3 growth continues to be backed by bank credit creation, notwithstanding a recent moderation in credit dynamics. The narrow monetary aggregate M1 remained the main contributor to broad money growth.
The annual growth rate of loans to non-financial corporations rebounded to 3.7% in February 2019, from 3.4% in January, reflecting mainly a base effect. Looking through short-term volatility, the annual growth rate of loans to non-financial corporations has moderated in recent months, reflecting the typical lagged reaction to the slowdown in economic growth. At the same time, the annual growth rate of loans to households remained broadly unchanged at 3.3% in February. The euro area bank lending survey for the first quarter of 2019 suggests that overall bank lending conditions remained favourable. 
Our monetary policy measures, including the new series of TLTROs that we announced in March, will help to safeguard favourable bank lending conditions and will continue to support access to financing, in particular for small and medium-sized enterprises. 
To sum up, a cross-check of the outcome of the economic analysis with the signals coming from the monetary analysis confirmed that an ample degree of monetary accommodation is still necessary for the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.
In order to reap the full benefits from our monetary policy measures, other policy areas must contribute more decisively to raising the longer-term growth potential and reducing vulnerabilities. The implementation of structural reforms in euro area countries needs to be substantially stepped up to increase resilience, reduce structural unemployment and boost euro area productivity and growth potential. Regarding fiscal policies, the mildly expansionary euro area fiscal stance and the operation of automatic stabilisers are providing support to economic activity. At the same time, countries where government debt is high need to continue rebuilding fiscal buffers. All countries should reinforce their efforts to achieve a more growth-friendly composition of public finances. Likewise, the transparent and consistent implementation of the European Union’s fiscal and economic governance framework over time and across countries remains essential to bolster the resilience of the euro area economy. Improving the functioning of Economic and Monetary Union remains a priority. The Governing Council welcomes the ongoing work and urges further specific and decisive steps to complete the banking union and the capital markets union.
We are now at your disposal for questions.”


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