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.
“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:
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