Published On: Wed, Apr 10th, 2019

ECB keeps easy policy unchanged amid spreading global gloom

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FILE PHOTO: Headquarters of the European Central Bank (ECB) are illuminated with a giant euro sign at the start of the
FILE PHOTO: The headquarters of the European Central Bank (ECB) are illuminated with a giant euro sign at the start of the “Luminale, light and building” event in Frankfurt, Germany, March 12, 2016. REUTERS/Kai Pfaffenbach/File Photo

April 10, 2019

By Balazs Koranyi and Francesco Canepa

FRANKFURT Reuters) – The European Central Bank kept its ultra-easy monetary policy unchanged as expected on Wednesday, giving recent stimulus measures time to work their way into the economy and counter spreading global gloom.

With economic powerhouse Germany skirting a recession, the ECB has already backtracked on plans to tighten policy but may be reluctant to do more as the root causes of the downturn — weak demand from abroad and political turmoil — are largely beyond its policy reach.

Highlighting the abundance of global turbulence, U.S. President Donald Trump threatened on Tuesday to impose tariffs on $11 billion worth of European Union products, opening a new chapter in his global trade war that is certain to dent confidence further.

The International Monetary Fund warned overnight that the global economy is slowing more than expected and a sharp downturn could require world leaders to coordinate stimulus measures.

For its part, the ECB has already gone to extraordinary lengths and promised on Wednesday to keep interest rates at record low at least through this year.

“The Governing Council expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary,” the bank said in a statement.

With Wednesday’s decision, the ECB’s deposit rate, currently its primary interest rate tool, remains at -0.40 percent while the main refinancing rate stands at 0.00 percent.

Attention now turns to ECB President Mario Draghi’s 1230 GMT press conference, with investors looking to see if the ECB discussed further delays to its first post-crisis rate hike or the side effects of years of negative rates.

TIERING?

With Draghi having argued that the ECB must study whether it needs to mitigate the unwanted effects of negative rates, some are hoping it will offer relief to banks, who transmit the bulk of the ECB’s policy to the real economy through their lending.

But policymakers are likely to have stuck to a long-standing line that ultra-easy policy is working as intended, and that banks remain net benefactors of record low rates so there is no acute need to compensate them for the hefty fee they pay to park their excess cash at the ECB.

The latter debate, simmering since 2016, is likely to intensify on Wednesday, however, as the growth slowdown suggests that rates could stay in negative territory even longer than now expected.

One option under study is a tiered deposit rate, which would shield lenders from part of the cost, in a similar vein to moves by central banks in Switzerland and Japan.

But personnel changes at the ECB risk delaying the discussion about tiering or whether to push out a rate hike even further.

With ECB Chief Economist Peter Praet leaving in May and Draghi in October, policymakers are reluctant to decide on a fundamental revamp of monetary policy before new leaders take charge of the 19-country euro zone’s most powerful institution.

Draghi’s successor will not even be named until after European Parliament elections in late May, with confirmation likely only in late summer.

A survey of lending published on Tuesday also tempered the need for any urgent mitigating measures as lenders said they expected business credit to grow and lending standards to ease this quarter.

The ECB also needs to keep its remaining policy powder dry in case of market turbulence around Brexit and the continued escalation of a global trade war, with risks growing that the U.S. administration will turn its attention to Europe.

Another complication with shifting to a tiered deposit rate is that it would signal low rates for longer, which is inconsistent with the bank’s guidance for a growth rebound later this year and a rate hike in 2020.

(Editing by Catherine Evans)



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