Europe in focus as ECB keeps rates on hold and Britain votes
Jun 09 2017 by Johnny Bowman
Negative rates are meant to encourage banks to lend money to businesses rather than holding it themselves or, as is the case with the deposit facility rate, depositing it with the ECB overnight.
"A surging euro was hit by a reality check today as ECB President Mario Draghi took a surprisingly cautious tone in his post-meeting statement, choosing to overlook an improved growth picture and instead focus on lowerinflation", said Richard de Meo, managing director of Foenix Partners.
The ECB dropped a reference to further interest rate cuts, while repeating it expects rates to remain at record lows for an extended period and well beyond its asset purchase program.
Ending the bond purchases and raising interest rates could have wide-ranging effects, such as a stronger euro and higher interest costs for heavily indebted governments. The ECB chief said nothing had substantially changed with regards to the outlook for underlying inflation, adding that the path remains low and flat. The economy is now expected to grow 1.9 percent this year and decelerate slight in 2018 and 2019. At the bank's last meeting in April, Draghi said risks were "tilted to the downside".
While the European Central Bank lifted economic growth projections, it said it saw inflation of 1.5 percent in 2017 and 1.3 percent in 2018, compared with its March forecasts of 1.7 percent and 1.6 percent respectively.
The euro was down 0.31% against the dollar at $1.12 after the announcement.
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Inflation projection for this year was trimmed to 1.5 percent from 1.7 percent.
Moreover, despite dropping the guidance for further rate cuts, Draghi said the European Central Bank stands ready to lower interest rates if the outlook worsened.
On Thursday, the bank left its bond purchase stimulus unchanged at 60 billion euros ($67 billion) per month through at least the end of the year and longer if necessary.
By pumping cash through the financial system and into the real economy, the bank believes it has stimulated growth and pushed inflation back towards its target of just below 2.0 percent.
That came after the European Union statistics agency Eurostat earlier revised up its estimate of first quarter growth to its fastest rate in two years, saying the economy of the 19-country euro zone expanded by 0.6 per cent quarter-on-quarter and by 1.9 per cent year-on-year. On one hand he said the "lack of core inflation is mostly due to subdued wages" but then admitted that "wage growth is damped by structural changes". Many analysts expect the bank to start tapering them in the early part of next year, in part because the ECB may start running out of eligible bonds to purchase. This depends also on the fact that, of the 5 million jobs created ("more than in the US"), many are low quality, temporary or part-time and salaries are negotiated looking back, when inflation was lower.