European Central Bank Moving Closer to Reducing Interest Rates and Taking Other Stimulative Actions

July 25, 2019

The European Central Bank Governing Council left policy settings unchanged but signaled likelihood of a multi-pronged stimulus after September’s fuller review. A zero percent refi rate has been flanked by a negative 0.40% deposit rate and a 0.25% marginal lending facility rate since cuts made in September 2016. The ECB leadership is in transition; IMF Director Christine Lagarde is now virtually assured to become the ECB’s fourth president on November 1, as the ECB Council announced its approval of her appointment. Two prior presidents were Duisenberg and Trichet, and the current one, Mario Draghi, completes his 8-year term in October.

The ECB statement identifies several downside risks: “softening global growth dynamics and weak international trade are still weighing on the euro area outlook. Moreover, the prolonged presence of uncertainties, related to geopolitical factors, the rising threat of protectionism, and vulnerabilities in emerging markets, is dampening economic sentiment, notably in the manufacturing sector. In this environment, inflationary pressures remain muted and indicators of inflation expectations have declined.” President Draghi’s statement then returns to a “whatever it takes” theme.

The Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner… We have tasked the relevant Eurosystem Committees with examining options, including ways to reinforce our forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.

Today’s statement pledges not to raise interest rates at least through mid-2020.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



Comments are closed.