VIENNA/FRANKFURT- The European Central Bank kept its main interest rate unchanged deep in negative territory on Thursday and stuck to its extraordinary stimulus policies aimed at reviving inflation and kick-starting growth after almost a decade of economic malaise.
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There is also a chance the ECB will signal the return of a funding lifeline for Greek banks and those hopes helped the country’s bond yields to hold near six-month lows hit last week.
Draghi also said the bank will act by using all the instruments available within its mandate to achieve its inflation goal.
Next week it starts buying corporate bonds and will offer ultra-cheap loans in late June, both measures aimed at cutting funding costs for corporate clients to induce investment and boost hiring. In the bond market, the benchmark 10-year Treasury note was up 11/32 in price to yield 1.808 percent, after touching its lowest level in two weeks.
“The ECB is ready for all contingencies”, Draghi told reporters in Vienna, where the Governing Council met on Thursday.
Fed-funds futures, used by investors to place bets on USA central-bank policies, showed Thursday the chances of the Fed raising interest rates were 23% at its June 14-15 meeting and 61% by its July 26-27 meeting, according to CME Group.
Draghi named “developments in the global economy”, the “upcoming British referendum” and “other geopolitical risks” as downside risks.
On the policy front, the European Central Bank decided not to alter borrowing costs, which have been at zero per cent since March.
“Once the Euro Working Group gives its clear signal on the prior actions it is expected that the waiver will be reinstated at the ECB’s next governing council meeting”.
Asked at the news conference for the Bank’s stance on a possible exit of Britain from the European Union, or Brexit, Draghi said the ECB was ready for such an eventuality but believed it was economically preferable for Britain to remain in the bloc. The decision to keep policy measures unchanged was expected by economists.
In March, the European Central Bank cut its main interest rate by five basis points (bps) to 0.00% and increased quantitative easing (QE) by €20bn to €80bn per month ($89bn, £62bn), while the deposit facility rate was cut by 10bps to -0.40% and the marginal lending facility rate to 0.25% from 0.30%. Draghi was opposed to any adjustment on the inflation target, as this would undermine credibility.
“Our expectation is that the QE programme will be extended to the end of 2017 and we think that an announcement could be made in September”, JPMorgan economist Greg Fuzesi said. Growth projections for 2017 and 2018 are now pegged at 1.7 percent.
The central bank’s latest set of macroeconomic projections can be found here. “For interest rates to be higher tomorrow, they have to be lower today”, he said.
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“No big surprises were expected for today’s European Central Bank meeting and no big surprises were delivered”, said Natixis economist Johannes Gareis.
