The European Central Bank (ECB) kept interest rates on hold today but signalled it will ease policy to kickstart the Eurozone economy unless growth picks up.
It said it now expects its main interest rates will stay at “present or lower levels at least through the first half of 2020”, ditching a pledge to keep them only at “present levels” and opening the door to cuts in the near future.
The ECB’s rate-setting governing council said it was “determined to act” if price inflation continued to stay low across the euro area. Its mandate is to get inflation to around two per cent to ensure smooth growth.
The statement of intent came as the 19-member Eurozone economy delivers anaemic growth in a tough environment of trade tensions and weak demand from China.
Last week the International Monetary Fund (IMF) predicted the area’s GDP will grow by just 1.3 per cent in 2019, 0.6 percentage points lower than the average growth expected for advanced economies.
Mario Draghi, the ECB’s outgoing president, said that “the prolonged presence of uncertainties” such as growing tariff threats and weakness in emerging markets “is dampening economic sentiment, notably in the manufacturing sector”.
In this environment inflation has stayed stubbornly low at around 1.2 per cent, far below the Bank’s target. Draghi said that inflation is likely to cool further.
He said “an ample degree of monetary accommodation is still necessary” to get it close to two per cent. He also said the ECB would now tolerate an overshoot of the two per cent mark.
Action could take the form of rate cuts and bond purchases, but it could also mean “tiering”, the Bank said. This means the current minus 0.4 per cent deposit interest rate – which means banks pay the ECB to keep money saved there – would not affect all of a bank’s reserves.
The euro fell after the policy announcement but rebounded somewhat when Draghi began his press conference. It was 0.1 per cent higher against the dollar by 4.20pm UK time at $1.116.
Stock markets slipped after the ECB kept rates on hold. The pan-European Euronext 100 index was 0.2 per cent down, the French CAC 40 down 0.4 per cent and the FTSE 100 lower by 0.1 per cent.
Draghi also called on governments to implement policies “to boost euro area productivity and growth potential, reduce structural unemployment and increase resilience”.
Oliver Blackbourn, a portfolio manager at Janus Henderson, said that “expectations are high” for a cut to the deposit rate in September. “There is also broad anticipation of renewed quantitative easing, though the make-up of any purchases is less certain.”
QE means creating new digital money to buy government and corporate bonds, encouraging spending and pushing down interest rates further.
Wolfgang Bauer, fixed income manager at UK firm M&G Investments, said: “Mario Draghi’s ECB presidency is likely to end not with a whimper but a bang.”
“An interest rate cut at the ECB’s upcoming monetary policy meeting in September seems highly likely.”
Rupert Thompson, head of research at investment firm Kingswood, said: “Exactly what the ECB ends up doing in September will most likely depend not only on whether the gloomy economic news continues” but also on the decisions of the US Federal Reserve.
Draghi said today that “incoming economic data and survey information” suggested “slower growth in the second and third quarters of this year”.
Principal Global Investors chief strategist Seema Shah said: “No doubt, people will continue to wonder if the ECB will purchase equities.”
Last week Blackrock’s chief executive Larry Fink said the Bank should buy shares to stimulate the euro area economy.
“I doubt they will venture into this new and controversial territory at the current stage,” Shah said. “Retail investors in Europe tend to buy fewer equities than in other parts of the world, therefore any benefit from purchasing equities via the ‘wealth effect’ may be less important for Europe.”
“Never say never, of course, for if the economy continues to deteriorate, then the ECB may end up with little choice.”