European Central Bank Leaves Interest Rates Unchanged and Stops New Asset Purchases

December 13, 2018

The ECB’s interest rate structure has been at a record low since March 2016, consisting of a zero refinancing rate flanked by an overnight deposit rate of negative 0.40% and a marginal lending facility rate of +0.25%. At its last policy review of 2018, the central bank’s Governing Council reaffirmed that these rates are likely “to remain at their present levels at least through the summer 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.”

Regarding quantitative stimulus according to a released statement, officials confirmed the pre-announcement, that purchases of new assets will end after this month and enhanced forward guidance on reinvestment to say that “we intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the Asset Purchase Program 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 favorable liquidity conditions and an ample degree of monetary accommodation.”

Updated growth and consumer price forecasts, which the bank does quarterly, underscore that downside risks to the baseline scenario have become a bit more pronounced. Projected growth in 2018 and 2019 was bumped down 0.1 percentage point each to 1.9% and 1.7%, and the newly introduced forecast for 2021 anticipates only a 1.5% rise in real GDP. Likewise, projected CPI inflation next year was taken down 0.1 percentage point to just 1.6% and put no higher than 1.8% even in 2021. That barely satisfies the medium-term target of below but close to 2.0%. The table below documents the evolution of these forecasts since the September 2017 meeting.

GDP, % 2019 2020 2021   CPI, % 2019 2020 2021
Dec 1.7 1.7 1.5 1.6 1.7 1.8
Sept 1.8 1.7 1.7 1.7
June 1.9 1.7 1.7 1.7
March 1.9 1.7 1.7 1.7
Dec’17 1.9 1.7 1.5 1.7
Sept 1.7 1.5

ECB President Draghi’s press conference also accentuated the more fragile outlook. There are several headwinds: Brexit uncertainties, the risk of an escalating tariff war, political strains within Europe, Italy’s fiscal plans, and prominent¬†vulnerabilities in emerging markets and financial market volatility.”¬† All in all, officials concluded that “significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term.” The authorities, it would seem, are likely to welcome further euro depreciation against the dollar, as the monetary stances of the ECB and Fed continue to diverge.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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