ECB forward guidance, key interest rates unchanged amid growth risks

by Ike Obudulu Last updated on June 6th, 2019,

The European Central Bank left its key interest rates and forward guidance unchanged on Thursday, in the first policy session since the end of its four-year long EUR 2.6 trillion asset purchase programme in December, as several risks including the persistent slowing of the economy, global trade tensions and the Brexit chaos cloud the outlook for Eurozone growth.

The Governing Council, led by Mario Draghi, left the key interest rates unchanged after the policy session in Frankfurt. The decision was in line with economists’ expectations.

The main refi rate is currently at a record low zero percent and the deposit rate at -0.40 percent. The marginal lending facility rate is at 0.25 percent.

Eurozone interest rates were raised last in July 2011 by 25 basis points.

“The Governing Council expects the key ECB interest rates 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 percent over the medium term,” the bank said in a statement.

Given the weaker growth and inflation outlook, and the persistent uncertainties linked to global trade and politics, some economists now expect the bank to raise interest rates only in 2020.

That would make Draghi, the only ECB President thus far who did not raise interest rates during his tenure.

ECB Chief Economist Peter Praet’s term is set to end in May and Draghi’s tenure in October.

“Regarding non-standard monetary policy measures, the Governing Council intends 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 it starts 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,” the ECB added.

ECB policymakers are wary of saying that the risks to the euro area economic outlook are tilted to the “downside”. In December, Draghi said the risks were “broadly balanced”.

Minutes of the December session showed that ECB rate-setters assessed the risk situation as “fragile and fluid”, saying that risks could quickly regain prominence or new uncertainties could emerge.

However, some members cited the emergence of new upside risks and said the recent negative news have been factored into the downward revision of the staff projection.

Draghi is set to hold his post-decision press conference at 8.30 am ET, when he is set to face several questions on the likelihood of the bank re-launching it offer of cheap loans for longer term. Policymakers debated the move in December.

Under the ECB’s earlier tool named the targeted longer-term refinancing operations, or TLTRO, the ECB gives longer-term loans to financial institutions at attractive rates to boost lending in the real economy.

Reporters are also expected to pose questions on topics ranging from trade protectionism, China slowdown to those on the domestic front such as the the Italian budget crisis and the “yellow vests” protests in France.

Recent economic data such as confidence indicators and the purchasing managers’ survey measures have also been relatively weak and suggested a broad-based slowdown across the big four euro economies.

Earlier on Thursday, survey data from IHS Markit showed that Eurozone private sector expanded at the weakest pace in five-and-a-half years at the start of the year, led by slower pace of growth in both manufacturing and services. The weakness of the auto sector remained a key area of concern, among others.

That said, the German economy ministry has said the biggest euro area economy likely avoided slipping into a technical recession in the fourth quarter.

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