FRANKFURT – The Latest on the European Central Bank’s monetary policy meeting (all times local):
The European Central Bank helped buoy stock markets with its bigger than anticipated package of stimulus measures. But questions over whether the package will do much to rejuvenate the ailing eurozone economy remain.
Laith Khalaf, senior analyst at stockbrokers Hargreaves Lansdown, says it’s hard to see how even lower interest rates and an increase in the bond-buying program can been seen as a positive development.
He says the fact the ECB is “still pursuing such extreme monetary policy paints a depressing picture of the European economy.” Markets, he adds, “are beginning to question what central banks have left in the locker if the global economy slips back towards recession.”
European stock markets remain up on the day, but down from highs reached after the ECB announcement. Germany’s DAX, for example, was only up 0.8 per cent, after being nearly 3 per cent higher earlier. The euro, meanwhile, is 0.5 per cent higher at $1.1044, having earlier tanked by 1.2 per cent.
European Central Bank head Mario Draghi says the stimulus unveiled Thursday includes measures to steady banks’ finances and increase their ability to lend to businesses.
The ECB will hold four rounds of cheap loans, at zero interest. If banks lend more to companies, they could qualify for a reduction in the interest rate to as low as minus 0.4 per cent.
Banks that lend more will be eligible to borrow more, Draghi said. “A bank that’s very active in lending to the real economy can borrow more than a bank that focuses on other areas.”
The loans will run through as long as March 2021, bringing “certainty of financing” that should enable lending.
The boost for bank finances comes after sharp drops in the share prices of major European banks, amid worries about their profitability and ability to meet financial obligations.
The European Central Bank has cut its inflation forecast for this year to 0.1 per cent for this year from 1.0 per cent — a reduction that goes a long way to explaining why the bank announced a broader than anticipated package of stimulus measures for the 19-country eurozone economy.
In its latest quarterly forecasts, the ECB also suggested that inflation would remain below its goal of just under 2 per cent over the coming years. In its first forecast for 2018, the ECB said inflation would only average 1.6 per cent.
ECB President Mario Draghi said that inflation would be low or negative this year in light of falls in commodity and energy prices. He said the bank’s broad package of measures is designed to prevent “second-round effects” across the eurozone, for example, in wage demands.
Draghi says the package of measures will help get inflation towards target in coming years.
Mario Draghi, the president of the European Central Bank, says the bigger than anticipated package of stimulus measures announced by the bank will “reinforce” the momentum of the eurozone economic recovery and “accelerate” the return of inflation to close to, but below, 2 per cent.
Draghi was speaking after the ECB announced its bold package that included a surprise reduction in the main refinancing rate to zero from 0.05 per cent.
Draghi also said interest rates would stay low for an extended period of time, and in an any case “well past” the end of the current bond purchases.
Inflation across the eurozone stands at minus 0.2 per cent, while quarterly growth remains tepid. In the fourth quarter of 2015, quarterly eurozone GDP grew by 0.3 per cent.
European stock markets have surged while the euro has tanked after the European Central Bank unveiled a bigger than anticipated stimulus for the 19-country eurozone economy.
Minutes after the announcement that including a surprise cut in the main refinancing rate to zero and an expansion of the bank’s monthly bond-buying purchases to 80 billion euros ($85 billion), the Stoxx 600 index of European shares was up 2.4 per cent to 347.20 while the euro dropped 1.2 per cent to $1.0853.
Most market participants had expected a reduction in the interest rate on deposits held by banks at the central bank to minus 0.4 per cent from minus 0.3 per cent, which was delivered, as well as a more modest expansion in the bond-buying program to 70 billion euros.
The European Central Bank has cut all its main interest rates including a surprise reduction in the main refinancing rate to zero per cent from 0.05 per cent.
It also reduced the interest rate on deposits held by banks at the central bank to minus 0.4 per cent from minus 0.3 per cent.
And it expanded its monthly bond-buying program to 80 billion euros ($85 billion) a month from the previous 60 billion.
Mario Draghi, the ECB’s president, will explain the reasoning behind the raft of measures at a press conference shortly.
Mario Draghi, the president of the European Central Bank, has a difficult task later when he outlines the details of the bank’s expected stimulus package.
The markets expect action but are nervous after last December’s package of measures failed to meet expectations.
Joshua Mahony, market analyst at IG, says that there could be a similar “disappointment” if the ECB doesn’t back an increase in its stimulus program in which it buys 60 billion euros ($65.5 billion) in bonds a month.
And Neil MacKinnon, global macro strategist at VTB Capital, says “the risk of market expectations being disappointed is quite high.”
Any disappointment could heap pressure on stocks and send the euro surging. A rising currency would weigh on the struggling eurozone economy as it would make the region’s exports more expensive and further dampen down already weak inflation by making imports cheaper.
Investors appear to be a little apprehensive ahead of the European Central Bank’s policy decision, with stocks down slightly.
The central bank is widely expected to cut a key interest rate further below zero and to step up its program to inject money into the economy, in the hope of raising inflation and economic activity.
The last time markets were expecting a new stimulus injection by the ECB, in December, the central bank underwhelmed, leading to a sharp drop in stocks. The euro surged as the stimulus was not as big as anticipated.
In midmorning trading, the Stoxx 600 index of European shares was down 0.1 per cent, while the euro was 0.3 per cent lower at $1.0970.