Hold: The ECB keeps interest rates and QE purchases steady as Mario Draghi defends loose policy from hawkish critics

 
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Mario Draghi Holds Press Conference At European Central Bank
Interest rates in the Eurozone are still at historically low levels (Source: Getty)

The European Central Bank (ECB) has kept interest rates constant and made no changes to its quantitative easing programme, despite growing pressure to remove its historically high rates of monetary stimulus.

The ECB’s rate-setting governing council kept its three main interest rates at the same levels since March 2016, when they were cut further in an attempt to boost the still slow recovery of the European economy.

The euro fell against the dollar on the announcement as ECB president Mario Draghi emphasised the slow pace of inflation in Europe. It dropped below $1.06 after the press conference, while also falling against sterling.

Draghi said: "A very substantial degree of monetary accommodation is required" to continue to boost inflation around the Eurozone. The central bank also stands "ready to increase our asset purchase programme in terms of size and/or duration" if necessary, as well as reducing it.

The main refinancing operations rate remain at zero per cent, meaning banks pay nothing to borrow from the ECB. The marginal lending facility, what banks pay to lend to each other overnight, remained at 0.25 per cent, while the deposit facility remained in negative territory, at minus 0.4 per cent, meaning banks pay to leave money with the ECB overnight.

Draghi also criticised the interventions of US President-elect Donald Trump in currency markets, pointing to the "Strong consensus … to refrain from competitive devaluations" among G20 nations. Trump had previously called for a weaker dollar.

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He said it was too early to comment on the effect of Trump's policies on the Eurozone, or the process of the UK leaving the EU.

On Brexit, Draghi said: "The final outcome of the negotiations will be very important. Whether it has economic consequences will depend on the shape of the outcome and the length of time it will take."

The ECB's announcement reiterated its commitment to quantitative easing until it sees a "sustained adjustment in the path of inflation". Low interest rates will remain "at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases", the bank said.

The rate of bond buying under the asset purchase programme, commonly known as quantitative easing, was not modified. The ECB had extended the bond purchases until December 2017, while reducing their scope from €80bn to €60bn each month after April.

On liquidity problems for bond purchases, Draghi said there were "no problems on that front". The ECB had previously been limited only to bonds yielding above the deposit rate, at minus 0.4 per cent, but was forced to remove that restriction in the face of restrictions on liquidity.

ECB president Mario Draghi has stressed his commitment to a “sustained presence” in bond markets under the quantitative easing regime in order to avoid a similar sell-off to the US “taper tantrum” in 2013, when yields soared as a result of the withdrawal of stimulus measures by the Federal Reserve.

Draghi has previously credited the ECB’s ultra-loose monetary policy with a significant contribution to the Eurozone’s recovery. He has also been heartened by a recent pick-up in the rate of inflation, which almost doubled to 1.1 per cent in December.

However, Draghi has come under recent pressure, including from members of the ECB’s governing council, to remove the stimulus, with fears it may be hurting some constituencies in the Eurozone.

German economists in particular have been outspoken in their opposition to quantitative easing, with Bundesbank president Jens Weidmann a prominent critic. However, Draghi reported "unanimous" satisfaction with December's decisions, implying some members of the Governing Council had dropped opposition.

“We don’t have public admissions of guilt" in the style of China's late dictator, Chairman Mao, said Draghi.

Draghi defended monetary policy against these criticisms, saying: "The benefits of our monetary policy have accrued to all citizens of the Eurozone."

How to understand the European Central Bank's interest ratesĀ 

The European Central Bank (ECB) has three rates:

  • The main refinancing operations: what banks pay to borrow from the ECB

  • The rate on the marginal lending facility: the rate at which banks lend to each other overnight

  • The deposit facility: the rate banks receive to leave money with the ECB overnight

The ECB has kept interest rates unchanged since March 2016, when all three were cut. They have since stayed at zero per cent, 0.25 cent and minus 0.40 per cent respectively.

If a rate is negative the bank will pay the ECB (rather than receiving money in interest). Negative rates are intended to encourage banks to lend money to businesses rather than holding it themselves or, as is the case with the deposit facility rate, depositing it with the ECB overnight.

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