Stockholm (Ekonamik) – At its monthly Monetary Policy meeting, on Wednesday, April 10, the ECB decided to hold policy interest rates constant for the 38th consecutive month, as expected. The central bank provided some guidance on the duration of present interest rate levels.
“Based on our regular economic and monetary analyses, we decided to keep the key ECB interest rates unchanged,” said ECB Governing Council President Mario Draghi, in his statement to the press. He went on to provide some forward guidance.”We continue to expect them to remain at their present levels at least through the end 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.” [Emphasis added]
The dovish stance is still motivated by uncertainty and a downward trend for growth. “The risks surrounding the euro area growth outlook remain tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets,” Draghi concluded.
Source: Bank of International Settlements (BIS)
The central bank took the same view regarding to its balance sheet as a tool to accommodate markets, although it stopped short of providing the same time template for its asset repurchases. “We intend to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme 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 favourable liquidity conditions and an ample degree of monetary accommodation,” Draghi reiterated to the press.
“The Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner,” the ECB President stated. As the figure below shows, the ECB’s balance sheet has peaked last year.
The announcement does not seem to have had a particularly strong effect on markets and the euro was relatively stable at just below US$ 1.127. Perhaps weighing more heavily on the central bank and on financial markets is the renewed threat of European tariffs by President Trump.
“We have to see, first of all, what happens, because as you’ve seen in the past between words and deeds there is often a big gulf. But certainly, even the fact that these threats are being vented with some frequency, they certainly undermine general confidence, and there is no question about the fact that that’s one of the reasons for the general weakness in the eurozone, I believe,” commented the ECB President. “Elsewhere in the world the confidence weakening has come from various threats, various vulnerabilities – it’s a combination of effects – but certainly also from these threats of further protectionist measures.” [Emphasis added]
The other issue on the mind of the ECB and of financial markets is the new long term loans programme announced by the ECB at the beginning of March. The programme will provide banks with cheap loans in the hope that this will facilitate cheaper credit to consumers and companies in the Eurozoen. “Details on the precise terms of the new series of targeted longer-term refinancing operations (TLTROs) will be communicated at one of our forthcoming meetings,” the ECB President also clarified. [Emphasis added]
“The central issue is whether the ECB will again offer a discount relative to the refi rate to incentivize banks to increase lending and whether this discount would be linked to the discount facility rate or rather as a simple negative spread on the refi rate,” said Carsten Brzeski, Chief Economist at ING Germany on the margins of the ECB meeting.
The last bank lending survey by the ECB suggests that demand for loans from enterprises and from households for consumer credit is relatively unchanged from the previous quarter. A net demand increase is visible in the net demand for housing loans.
The hope is that the new round of TLTROs, due later in the year, will lead to an expansion in loan demand.