–ECB Pledges to Hold Rates Steady to Yearend
By Laurie Laird
FRANKFURT (MaceNews) – The European Central Bank could ease the burden of negative interest rates on the region’s banks, raising concerns that prolonged weakness in the euro zone economy could require further stimulus measures, even the resumption and expansion of quantitative easing.
The ECB maintained its current stance at Wednesday’s governing council meeting, pledging to maintain interest rates at their present level through the end of this year. The Bank also held its main refinancing rate at 0.0% and its deposit facility rate at -0.4%, both record lows.
But in response to what he termed a “persistence of uncertainties,” ECB President Mario Draghi refused to rule out a further quantitative easing programme that could include the purchase of equities, in response to a question asked by Mace News. “When we are approaching the point” of implementing further stimulus … we reiterate the readiness to use all the instruments at our disposal,” he said, adding that “We are not there yet.”
His comments come a day after just a day the International Monetary Fund slashed its 2019 euro zone growth forecast by 0.6 percentage points to 1.3%, bringing its outlook closer to ECB’s own forecast of 1.1%.
Draghi acknowledged the effect of below-zero interest rates on bank profitability, announcing the governing council’s intention to “consider whether the preservation of negative interest rates requires the mitigation of their possible side effects, if any, on bank intermediation.” The ECB president declined to comment on whether such an assessment suggests that interest rates could remain lower for longer, but did attribute weak profitability to an over-crowded European banking sector.
Banking analysts expect the central bank to consider a tiered deposit scheme, allowing banks to exempt a portion of reserves held at the central bank from the -0.4% annual charge. The governing council will need “further information that will come to us between now and June” before announcing new measures, Draghi told reporters.
But Draghi denied suggestions that the governing council might eschew major policy changes until a new leadership team takes over later this year. Draghi is due to step down in October, and chief economist Peter Praet attended his last governing council meeting on Wednesday.
“Decision making is not dependent on who’s going to be on the board or not,” he said.
The ECB president repeated his belief that emerging market vulnerabilities and the threat of protectionism represent the greatest risks to euro zone growth. His warning came just a day after U.S. President Donald Trump threatened tariffs on EU imports worth $11 billion, accusing European governments of providing illegal state aid to Airbus, giving the European aircraft giant an unfair advantage in its epic battle with Boeing for aviation supremacy.
The articulation of such threats undermines economic confidence across the world, Draghi stressed, but acknowledged that when it comes to U.S. trade threats “there is often a big gulf … between words and deeds.”
— Courtesy of MT Newswires