ecb mar 19 rate decision reaction
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The ECB roiled markets with unexpected measures.
The ECB roiled markets with unexpected measures.
  • First Rate Hike Delayed Until At Least Next Year
  • Market Responsible For New Rate Schedule?
  • TLRTO-III Due In September
  • Economic Projections Revised Sharply Downward
  • Euro-linked Assets Take A Hit


Frankfurt, 7 Mar (LS News) -- The European Central Bank surprised the market by announcing plans to keep interest rates at current levels through at least the end of this year, and the bank ended speculation about another round of long-term, low-interest bank loans with plans to introduce them in September.


The news pushed the euro sharply lower against the pound and well below 1.13 against the dollar.  The 10-year bund yield dropped to its lowest level since 2016.


At the press conference following the end of today’s governing council meeting, ECB President Mario Draghi seemed to link the market’s prediction of the first rate increase, which was expected in mid-2020 earlier this week, to the extension of the rate-hold period.


“We have enhanced the credibility of the forward guidance with today’s decision,” Dragi said.


ING Chief German Economist Carsten Brzeski said, “It’s very strange to suggest that ECB adjusted the forward guidance because markets’ expectations were further out anyway.


“The whole thing remains an awkward combination of panic, trying to stay ahead of the curve, and actionism.”


Behind the Curve? Us?


Brzeski echoed the concerns of a number of analysts who suggested that the ECB has failed to keep up with the shifts in the economy.


“We never thought we were behind the curve,” Draghi said. “And today we are not behind the curve for sure.”


In its monetary policy statement, the bank said: “The governing council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019.” The previous forward guidance was to hold rates steady through the summer.


The ECB also said the next round of targeted longer-term refinancing operations (TLTRO-III) will be launched in September.


“This is about as dovish as anyone could have expected,” Pantheon Macroeconomics Chief Eurozone Economist Claus Vistesen said.


Speaking on Bloomberg TV, Rabobank Head of FX Strategy Jane Foley said: “They have very little to talk about at the next meeting.”


She noted that the decision to offer new long-term bank loans is like the ECB saying, “We’re here to hold the banks’ hands.”


Foley said the ECB may have decided to announce the TLRTO decision to provide a sense of stability prior to possible political uncertainty in Europe in the coming months. Brexit is looming, EU elections are scheduled for the end of May, and Foley noted that Spanish balloting next month could reignite Madrid’s problems with separatist factions in Catalonia.


Forecasts Fall


The ECB’s hard-dovish shift follows rising concerns about the strength of the euro-area economy. The ECB slashed its 2019 GDP growth projection to 1.1pct from the 1.7pct forecast announced in December.

On Wednesday, the Organization for Economic Cooperation and Development (OECD) cut its Eurozone growth forecast for this year to 1pct from the previous 1.8pct.


Draghi said all of today’s decisions were “data-driven” and followed the downward revisions by the bank’s staff. He added that the governing council was “unanimous” in its backing of the new measures.


However, “several” council members suggested that the bank keep rates at current levels until March of next year, Draghi said.


The ECB president once again blamed problems outside of Europe for flagging growth. “These external factors continue to be weighing on the Eurozone economy.”


But Draghi said the new monetary policy stance in the US and government adjustments in China indicate other countries are acting to improve the economic environment.


ING’s Brzeski said the effects of the ECB’s plans announced today will have little effect beyond the euro-area border. “Given that the risks for the Eurozone actually come from external risks, there is very little these measures will do to tackle them.”


Growth Still Coming For Eurozone


Despite the ECB’s downward revisions, Draghi said rate-setters expect the euro-area economy to avoid contraction.


“The governing council, all members, expressed confidence in the baseline. We assessed the probability of a recession as very low.”


Draghi did his best to beat the dove drum during the press conference, often repeating that the bank’s monetary policy remains “quite accommodative”. At one point he said that the end of the ECB’s goliath EUR2.6tln quantitative easing scheme in December was not an example of cutting stimulus.


“We didn’t tighten when we stopped the asset purchase programme,” he said, pointing out that the bank continues to buy financial instruments with proceeds from maturing assets.


Even with weaker inflation expected this year, Draghi reiterated the bank’s optimism that consumer price growth will eventually rise to the ECB’s target.


“We have confidence it will converge, but at this point in time it will take longer.”


--- Eric Culp

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