European Central Bank holds policy steady as investors look for tapering hints

Jasper Jolly
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Investors will scrutinise ECB president Mario Draghi's comments on quantitative easing (Source: Getty)

The European Central Bank has announced it will leave monetary policy unchanged, with investors set to scrutinise the comments of top policymaker Mario Draghi for signs the bank will tighten monetary policy in September.

Asset purchases by the bank remained unchanged, with €60bn of quantitative easing bond purchases due to continue each month until the end of December. The ECB retained its statement that it stands ready to increase the size of the programme.

However, the ECB is expected to give markets an early warning of its plans for renewing the stimulus, with investors now eyeing the September meeting of the rate-setting governing council for an explicit move.

Read more: Watch out, ECB: Half of fund managers think monetary policy is too loose

The ECB's key interest rate, on main refinancing operations, remained at zero per cent.

The euro weakened against the US dollar to reach its lowest in two days in response, at around $1.148, after investors were left without any hint of tighter monetary policy from the central bank.

The yield on the 10-year German government bond fell by around one basis point over the course of the session to hit lows of 0.526 per cent.

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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