European Central Bank rules out further rate cuts

Jay Anderson
June 19, 2017

The Governing Council, meeting yesterday, dropped its guidance that rates might fall further, saying only that it now expects borrowing costs to stay at present levels for an extended period.

With Thursday's decision, the ECB's deposit rate, its key policy tool, remains at -0.4 percent.

Eurostat earlier estimated that the eurozone economy grew by 0.6 per cent in the first quarter of 2017, up from 0.5 per cent in the final quarter of 2016.

It also revised its inflation outlook for the following years to 1.3% in 2018, and 1.6% in 2019 as against 1.6% and 1.7% respectively.

The ECB has predicted a growth across the eurozone of 1.9% - up from the predicted 1.8% which was forecast in March. The central bank needed "stronger confidence" that price growth will hold at its goal of just below 2 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.

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The ECB now anticipates inflation levels of 1.5% in 2017, 1.3% in 2018 and 1.6% in 2019. Lena Komileva, economist at G-plus Economics, argued that investors may be putting too much emphasis on what was a "dovish performance" by Draghi.

"We are now confident that inflation will converge with our objectives", he added.

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The downgrade mainly reflected lower oil prices, Draghi said.

The risks surrounding the euro area growth outlook are considered to be broadly balanced, Draghi said.

Solid economic growth but subdued inflation has left the European Central Bank in a quandary. In response, the Euro Stoxx banking index is up 1.8% while German DAX 30 rose 0.3% closing in on the record high it set last week. The outlook for next year was raised to 1.8% from 1.7%.

"Similarly, the press release repeated that asset purchases are meant to continue - again indicating that this is not a promise - until the end of 2017, and that the Governing Council stands ready to increase the programme in terms of size or duration". By now, this combination has become an invitation for continued political pressure from some quarters to tighten monetary policy.

At that rate, the 19 countries that use the euro would see growth at 2.3% this year, almost double the rate of the USA, which is on course to grow 1.2%.

"If you look at the pace of inflation excluding energy and food, you realize that we are back to a rate that we've seen many times before, namely 0.9 percent", said Michael Schubert, ECB analyst at Germany's second-largest lender Commerzbank.

"We still expect an European Central Bank announcement in September that bond purchases are to be tapered off gradually as of January and. halted at the end of 2018", Commerzbank economist Joerg Kraemer said.

Other reports by BadHub

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