ecb july rate decision
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- Rates Unchanged

- Forward Guidance Now On ‘Easing Bias’

- Tiered Deposit Rate Could Accompany Rate Cut

- Bank Staff Studying QE Options

- Upside Wiggle Room For Inflation Target


Frankfurt, 25 July (LS NEWS) – The European Central Bank said it is ready to implement lower interest rates and a wide range of other measures to induce more economic growth in the Eurozone, and the bank staff is even studying the possible return of quantitative easing.


But ECB President Mario Draghi said some members of the bank’s governing council were still questioning parts of the package, which lowered market hopes for a kitchen-sink approach to spur European growth.


However, according to Claus Vistesen, Pantheon Macroeconomics’ chief Eurozone economist, these concerns are unfounded. “Draghi’s comments today can be summed up in the shift from the idea that the ECB is “committed to act” to the position that it is now “determined to act,” not to mention the repeated reference to the fact that ECB governors “do not like what they’re seeing in the inflation data."


Today’s announcement fell one day short of the seven-year anniversary of Draghi’s “whatever it takes” speech on preserving the euro.


ING Chief German Economist Carsten Brzeski said, “Not everyone at the ECB seems to be ready for a big September package yet, but this should not stop the ECB from acting.


“In our view, the likelihood of a package of several measures at the September meeting, rather than a series of smaller measures, has clearly increased. Think of a 20bp cut of the deposit rate, a tiering system, a lowering of the TLTRO pricing and a restart of QE by EUR 20-30bn per month.”


Rupert Thompson, head of research at Kingswood, said the ECB “all but committed itself to easing at its meeting in September”.

Dovish, Then Less So

The German 10-year Bund yield fell to a record low and EUR/USD declined after the release of the ECB’s monetary policy statement only to push above pre-announcement levels during the follow-on press conference with ECB President Mario Draghi. (More details on market reaction below.)


The ECB changed its forward guidance to include the possibility of lower rates after saying in June it would hold at current levels through at least the first half of 2020. This means the bank is now on an “easing bias”, Draghi said.


The market widely expects the ECB to lower the deposit rate to -0.5pct from the current level of -0.4pct at the next monetary policy meeting in September, but Draghi said a rate cut was not discussed in the governing council, further diminishing the dovishness of Thursday’s policy shift.


He also said a number of policymakers are apprehensive about offering select lenders better conditions. “Some council members have doubts about a two-tier system.”


In a minor surprise, the bank opened the door for a return of quantitative easing. The monetary policy statement said bank staff will study “the size and composition of potential new net asset purchases”, an indication that another round of QE could be in the works.

Growth Warnings Still Flashing


The outlook for the Eurozone’s industrial sector continued to disappoint this week. A survey of purchasing managers released Wednesday showed another decline the manufacturing index. A few hours before the ECB decision Germany’s Ifo thinktank said sentiment among the country’s manufacturers was “in freefall” and expectations for German business fell to their lowest level in a decade.


The Bundesbank, Germany’s central bank, warned this week that Europe’s largest economy likely contracted over the past three months.


Draghi said the outlook for the Eurozone economy “is getting worse and worse”. He blamed the flagging growth on trade wars, geopolitical tensions, the increased possibility of a hard Brexit, and a slow rotation of the Chinese economy.


“Incoming signs are showing weakness of growth in the third quarter,” he said, adding that this makes a rebound more unlikely.


Despite the mounting signs of a slowdown, Draghi said: “We still see the risk of a recession as being pretty low.”

Unofficial Widening Of Inflation Target

Speculation and news stories prior to Thursday’s decision said the bank could decide to expand its inflation target of near but below 2pct by allowing for periods above that mark to balance out shortfalls, but Draghi doubled down: “There isn’t any change.”


He did note that there was a discussion about possibly altering the target, adding that at the moment, “there is no 2pct cap”.


Kingswood’s Thompson said, this stance is “implying that an overshoot would be tolerated to compensate for past undershooting”.


Eurozone headline inflation fell to 1.3pct in June. Low expectations for consumer price growth is “why we are determined to act”, Draghi said.


Detailed Market Reaction


Prior to the decision markets had factored in 50pct probability of a rate cut at the meeting. Therefore, the initial reaction was one of disappointment, with bonds and European indices falling.


The EUR/USD pair fell to a new multiyear low just above 1.1100. The euro regained its composure ahead of Draghi’s press conference and it triggered stops as it rebounded versus the USD on profit taking.  


At the European close, EUR/USD finished higher (1.1161), above levels seen ahead of the ECB meeting.


--- Eric Culp







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