Thursday, August 7, 2014

ECB maintains rates, as expected

    The European Central Bank (ECB) maintained its benchmark refinancing rate at 0.15 percent along with its marginal lending facility rate at 0.4 percent and its deposit rate at minus 0.10 percent.
    The decision to hold rates steady was widely expected by financial markets that will now turn their attention to today's press conference by ECB President Mario Draghi, who in July reiterated the guidance that interest rates would remain at the current level for an extended period of time.
    In June the ECB cut its refi and deposit rates by 10 basis points, becoming the first major central bank to push the deposit rate into negative territory, in effect charging banks for depositing their excess reserves at the bank instead of using the funds to stimulate economic activity.
    It was the ECB's first rate cut in 2014, following two cuts in 2013 by a total of 50 basis points in 2013 and a 25 point cut in 2012.
    In addition, the ECB launched a series of measures aimed at boosting economic growth and pushing up inflation that is being described as "lowflation," a prolonged period with low inflation.
    The headline inflation rate in the 18-nation euro area declined to 0.4 percent in July from 0.5 percent in May and June and the weakest since October 2009. The ECB targets inflation that is close to, but below 2.0 percent.

    The ECB's measures from June included up to 400 billion euros in targeted longer-term refinancing operations (LTROs), aimed at encouraging banks to lend to households and non-financial firms. It also extended its refinancing operations as fixed tenders with full allotment at least until the end of December 2016 and stopped sterilizing liquidity that was previously injected into markets under the ECB's Securities Markets Program.
    ECB policymakers have made it clear that they are ready to embark on outright asset purchases - known as quantitative easing - if inflation continues to remain too low but also want to give the current stimulative measures time to take effect.
    The Gross Domestic Product of the euro area expanded by 0.2 percent in the first quarter from the previous quarter for annual growth of 0.9 percent, up from 0.5 percent. The unemployment rate eased to 11.5 percent in June from 11.6 percent in April and May.


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