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ECB maintains interest rate at record low levels
European Central Bank (ECB) kept Eurozone’s interest rates at the same levels, but reiterated its readiness to react in the near future and called for national economies within the bloc to step up their efforts to assist growth.
Given suggestions that the UK’s recent referendum result to exit the European Union is not having such a great impact as initially forecasted, the ECB decided to keep the Eurozone’s main interest rate at zero. However, the Bank’s President Mario Draghi said that inconsistency, fears surrounding Brexit, and the overall pessimistic sentiment are big enough reasons to hold back economic growth and hence the release of the downwards-adjusted economic outlook.
Together with keeping the interest rate unchanged, the ECB also made no adjustments to the current monthly schedule involving the purchase of €80 billion worth of bonds which is part of its Quantitative Easing (QE) programme. The statement said that QE would continue until the first quarter of 2017 as scheduled and could be extended if necessary surprised the markets as there were forecasts for the publication of a more precise timeline for its extension. The ECB President repeated himself that ECB remains on standby to increase its monetary stimulus if necessary in order to adjust inflation towards its 2% target, while at present the inflation rate is at 0.2%.
Following the ECB’s meeting back in March and the unveiling of a package of monetary measures, the interest rate was adjusted since then to a record low. The package also included the trim of borrowing costs and the lowering of the bank deposit rate further into negative territory, and since then the QE programme has been expanded to the current €80 billion purchase of bonds on a monthly basis.
During his conference, Mario Draghi said that the current economic measures are effective and reassured the markets that there are more measures available for use in case that inflation fails to move upwards. He explained that the ECB aims to carry out its QE programme smoothly by creating e-money for purchasing debt and said that there was no discussion for expanding the programme to include the purchase of stocks or the printing of money for large projects within the bloc’s nations. As part of the ECB’s efforts to reignite the economy, he said that there have to be significant economic changes on nation-level to assist the employment sector and boost growth.
Eurozone’s economic outlook was adjusted downwards by the ECB since the last economic data in June. Although the Gross Domestic Product (GDP) is now forecasted to increase by 1.7% compared with the previous estimate of 1.6%, while the projections for 2017 and 2018 are for economic growth by 1.6% each year compared to the previous estimate of 1.7%.
The EUR/USD on Thursday reacted negatively following the ECB’s interest rate decision and Mario Draghi’s conference as the currency pair’s rate fell by 0.8% and erased a large part of the day’s gains. On Friday, its rate continued downward’s as it fell by an additional 0.3% while on a weekly basis there was an increase by 0.7%.
This week’s release of UK inflation data for August, expected for release on Tuesday 13 September at 08:30 GMT, will be of interest following July’s annual rate increase to 0.6% from previous month’s 0.5%. Analysts remain optimistic and forecast further increase to 0.7%.
http://www.bbc.com/news/business-37309128
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