ECB holds rates as strategic review gets underway

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ECB holds rates as strategic review gets underway

  • In its first rate decision of the year, the central bank’s Governing Council voted unanimously to keep the main deposit rate at a historic low of -0.5%, in line with market expectations.
  • The marginal lending facility remained at 0.25%.
  • The ECB’s first strategic review is expected to assess whether its near 2% inflation target is appropriate.

The European Central Bank (ECB) on Thursday held interest rates steady as it launched its first strategic review since 2003, in a bid to establish whether its inflation target is still appropriate.

In its first rate decision of the year, the central bank’s Governing Council voted unanimously to keep the main deposit rate at a historic low of -0.5%, in line with market expectations. The marginal lending facility remained at 0.25% and the main refinancing operations rate stayed at 0%.

In a press conference following the decision, ECB President Christine Lagarde said rates will “remain at their present or lower levels until we have seen the inflation outlook robustly converge to a level sufficiently close to, but below 2% within our projection horizon, and such convergence has been consistently reflected in underlying inflation dynamics.”

Lagarde added that the Governing Council “stands ready to adjust all of its instruments as appropriate” in order to guide inflation towards target.

Net asset purchases as part of the quantitative easing program started in November at a monthly rate of 20 billion euros ($22.3 billion), and the ECB reiterated on Thursday that this will continue to run “as long as necessary” to reinforce the accommodative policy stance.

The strategic review launched Thursday was one of the first moves announced by Lagarde upon starting her tenure, with the central bank’s persistent low interest rate stance under fire from market participants who say it has become detrimental to economic growth.

Details on the scope and timetable of the review will be published at 3:30 p.m. CET.

The strategic review is expected assess why inflation has remained stubbornly below target for many years, and whether the means of calculating the target needs to change, among other considerations.


Markets will be paying close attention to the three ‘Ts’ when the scope of the review is announced, Michael Brown, senior market analyst at Caxton, said in a note Wednesday.

Firstly, target; will the ECB revise their inflation aim, perhaps targeting inflation symmetrically or defining the target more precisely? Secondly, transparency; the Governing Council are likely to discuss publishing voting records or adopting an interest rate forecast similar to the Fed’s dot plot. Thirdly, timing; policymakers are likely to want to conclude the review before year-end.


In September last year, Lagarde’s predecessor Mario Draghi cut the ECB’s deposit rate by 10 basis points to its current level and launched a massive new QE program in a bid to stimulate the euro zone economy and push towards the central bank’s inflation target.

Lagarde inherited an inflation rate of 1.0% in the euro zone upon taking the reins in November.


Risks ‘tilted to the downside’

Lagarde told the press conference on Thursday that the risks surrounding the euro area growth outlook “related to geopolitical factors, rising protectionism and vulnerabilities in emerging markets remain tilted to the downside, but have become less pronounced as some of the uncertainty surrounding international trade is decreasing.”

Inflation is expected to increase over the medium term, but she reiterated that other policy areas must “contribute more decisively” in order to “reap the full benefits” from the EBC’s accommodative policy measures.


The implementation of structural policies in euro area countries needs to be substantially stepped up to boost euro area productivity and growth potential, reduce structural unemployment and increase resilience, Lagarde added.


(Source CNBC, ECB)

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