ECB Keeps Things the Same

July 21, 2016

Concluding that the immediate disruption to eurozone financial markets from the British Brexit referendum had been short-lived in part because of policy supports to make the banking system more resilient, the ECB Governing Council left interest rates and non-standard policy instruments unchanged and released a statement explaining the latest thinking on the economic outlook.

Officials expect a moderately paced, domestic demand-led recovery to continue and foresee inflation, after a period of remaining quite low to start rising late this year largely on favorable base effects in energy prices, which were falling very sharply a little less than a year ago.  The structure of central bank interest rates now ranges from a negative 0.40% deposit rate to a zero refinancing rate and a marginal lending facility rate of +0.25%.  The ECB is committed to bond buying at no less than the present rate over at least the next three quarters.  The statement repeats the following forward guidance:

Given prevailing uncertainties, the Governing Council will continue to monitor economic and financial market developments very closely and to safeguard the pass-through of its accommodative monetary policy to the real economy. Over the coming months, when we have more information, including new staff projections, we will be in a better position to reassess the underlying macroeconomic conditions, the most likely paths of inflation and growth, and the distribution of risks around those paths. If warranted to achieve its objective, the Governing Council will act by using all the instruments available within its mandate….. We continue to expect them [rates] to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases. Regarding non-standard monetary policy measures, we confirm that the monthly asset purchases of €80 billion are intended to run until the end of March 2017, or beyond, if necessary, and in any case until the Governing Council sees a sustained adjustment in the path of inflation consistent with its inflation aim.

In Q&A, ECB President Draghi played down any effect of the unsuccessful coup in Turkey, estimated that Brexit will cut ECB growth by around a quarter to a half percent over the coming three years, disclaimed the Brexit remains fraught with uncertainty so that its impact can be only sketchily estimated at this point, and argued the case for a wait and see stance until more information on ECB economic conditions can be examined.

Copyright 2016, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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