ECB alters forward guidance signalling rate cut, stimulus

by Ike Obudulu Posted on July 25th, 2019

Frankfurt: The European Central Bank on Thursday left its key interest rates unchanged, but altered its forward guidance to give a clear signal that its is planning an interest rate cut in the near term and a comprehensive stimulus package that possibly includes a tiering system and a fresh round of asset purchases.

The Governing Council, led by ECB President Mario Draghi, kept the key interest rates unchanged after the policy session in Frankfurt, as expected.

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 ECB altered its forward guidance by adding the word “lower” to its expectation over interest rates.

“The Governing Council expects the key ECB interest rates to remain at their present or lower levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to its aim over the medium term,” the bank said.

Economists widely expect that rate cut to come in September in the form of a 10 basis points reduction to the deposit rate.

Further, the ECB said policymakers stressed “the need for a highly accommodative stance of monetary policy for a prolonged period of time”, citing the persistently below-target inflation levels.

“Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim,” the bank said.

The Governing Council stands stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner, the ECB added.

Consequently, relevant Eurosystem Committees have been tasked with examining options, including ways to reinforce its 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, the ECB said.

“Up to now, it is clear that today’s meeting was the last stop before new ECB action,” ING economist Carsten Brzeski said.

“It now increasingly looks as if the September meeting will not only bring a single measure but rather a package of several measures.”

The ECB ended its massive EUR 2.6 trillion Asset Purchase Programme, which began in 2015, in December.

A tiered deposit rate can partly reduce the burden of the cost banks pay on the cash they park at the ECB.

Draghi, whose term ends in October, is set to be the only ECB chief thus far who did not raise interest rates. The impending rate cut and further stimulus would be his final push to rev up euro area growth and inflation.

The ECB chief is set to hold his post-decision press conference at 8.30 am ET in Frankfurt.

Early this month, IMF Managing Director Christine Lagarde was chosen to replace Draghi as the ECB President. The former French finance minister is the first woman to be at the helm of the central bank for 19 countries that has euro as the currency.

ECB staff is considering a potential review of the bank’s monetary policy strategy, including its inflation goal, Bloomberg reported this week. Such discussions are set to gain momentum under the new ECB chief Lagarde.

The ECB targets inflation “below, but close to 2 percent.”

Rate-setters considered the need for “more strategic” measures if inflation continued to remain low and that the bank’s communication should stress that deviations of inflation from the bank’s target in both directions would be tolerated, minutes of the June policy session revealed.

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