Mario Draghi says Brexit has had no economic impact as the European Central Bank (ECB) holds interest rates steady

BELGIUM-EU
Mario Draghi wants ECB policy to be boring (Source: Getty)

European Central Bank (ECB) president Mario Draghi said Brexit has so far not had a significant economic impact.

Draghi said: "We haven't seen yet a consequence" or a "significant economic impact" from Brexit, despite the ECB's expectations.

He also painted a more positive picture of the Eurozone economy as the bank held monetary policy steady, as expected.

Draghi said any "urgency that was associated with the risk of deflation isn't there," but stuck to the ECB's line that it will continue to "look through" inflation rises "to the extent that they are transient".

He added he was "not yet ready to pronounce victory on the inflation front."

The ECB has been steadfast in its commitment to ultra-loose monetary policy since extending its quantitative easing programme of bond purchases, albeit at a slower rate.

While inflation rose to two per cent in the Eurozone in February, core inflation has remained stubbornly low, at 0.9 per cent annually.

Draghi's slightly more upbeat outlook boosted the euro briefly to above $1.06 against the dollar, while German government bond yields rose to their highest point in over the month, according to Tradeweb.

The refinancing rate remains 0 per cent, the deposit facility rate is still minus 0.4 per cent and the marginal lending rate remains at 0.25 per cent.

"With the threat of triple-dip recession seemingly gone, the latest rates decision signals a conservative approach from the ECB, potentially causing more friction with the better performing Eurozone economies," said Dennis de Jong, managing director at UFX.com.

"The ECB has generally erred on the side of caution when altering its benchmark rate, and some onlookers now believe it won’t make a move until after contentious elections in the Netherlands, France and Germany.

"However, with many arguing that cheap money is damaging in the long run and inflation rates at their highest in four years, all eyes will be on the governing council over the coming months to see if their inactivity is punished."

At its last meeting in January the ECB held its three main interest rates steady at levels last changed in March 2016, when they were cut in an effort to stimulate further recovery in the Eurozone.

Quantitative easing was extended until December 2017 at the end of last year, although the rate of purchases was reduced from €60bn (£52bn) per month starting in April.

Read more: ECB continues to look through rising inflation as big risks loom

However, political pressure is rising on the ECB to tighten monetary policy as the performances of Europe’s economies diverge, with some politicians and economists criticising the distorting effects of quantitative easing in particular on asset prices.

Germany, the largest economy in Europe, saw inflation break above the ECB's target of near but below two per cent in February, with the prospect of further rises to come as the global increase in oil prices continues.

Read more: Draghi rejects Trumpism as he reiterates commitment to QE

Ahead of today's annoucnement, Marius Gero Daheim, senior Eurozone strategist at SEB, said: “We expect the ECB at its meeting today to resist mounting public and internal demands for an exit from QE and instead confirm the monetary policy course for 2017 which it mapped out at the December 2016 meeting.

“However, updated ECB staff projections should convey a more optimistic outlook for Eurozone GDP growth and inflation,” he said.

A more upbeat outlook on the European economy could be a prompt for a move away from safe-haven German government debt as investors look for signs of the beginning of tapering.

Kit Juckes, global strategist at Societe Generale, said: “Any change in forecast, any sign that policy is likely to shift after the French election are out of the way, is bad for Bunds.”

But this will be tempered by the ECB's desperation to avoid a European version of the "taper tantrum", in which investors dumped bonds en masse after the Federal Reserve started withdrawing stimulus.

Read more: Hold: The ECB keeps interest rates and QE purchases steady

For more concrete signs of long-term monetary policy, and loosening in particular, investors may have to sit through many more meetings until the political future in particular of the EU is more certain.

Vincent Juvyns, global market strategist at JPMorgan Asset Management, said: “Another few quarters of macroeconomic data and knowing the outcome of the French elections are probably necessary for the ECB to start to change its tone and prepare markets for a change in its policy.

“We could start to hear the first communications about tightening of the monetary policy in the third and fourth quarter of this year and a tapering to zero could be expected for the start of 2018, all other things remaining equal.”

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.

Related articles