The European Central Bank (ECB) will keep interest rates on hold at record-low levels until at least the second half of 2020, it said today, as it tries to spark some life into the Eurozone economy.
Its guidance had formerly said rates would stay on hold until the end of 2019, but weak Eurozone growth and limp inflation has recently put pressure on the bank.
Its main lending rate will stay at zero per cent, the ECB said today, while the deposit facility will remain at minus 0.4 per cent, meaning banks are charged for leaving money with at the ECB.
The decisions, announced at an ECB event in Vilnius, Latvia, come as US President Donald Trump wages a trade war with China and Mexico, and threatens to turn his sights on the European Union.
ECB president Mario Draghi today said: “The uncertainty about global trade growth has extended beyond what we believed in March, and that’s why we have extended our future guidance.”
The more dovish tone sent the euro higher against the dollar. It had climbed 0.3 per cent shortly before 3pm UK time to buy $1.126.
Yet many investors, who are expecting a rate cut before too long, had wanted a more dovish move. This cooled European stock markets, with the German Dax falling and the French CAC and pan-European Euronext slipping back after a strong start to the day.
Change in forecasts
Despite the uncertainty, the ECB slightly upgraded its forecast for short-term economic growth. It said the Eurozone will grow 1.2 per cent this year, up from its 1.1 per cent prediction in March.
Yet it downgraded growth for the following two years. The area is now predicted to expand by 1.4 per cent in 2020 and 1.4 per cent in 2021, as opposed to the 1.6 and 1.5 per cent foreseen in March.
Draghi said the growth prospects were “not bad,” adding: “There isn’t any serious worsening in the outlook.”
Headline inflation is expected to rise to 1.3 per cent this year from March’s 1.2 per cent prediction. It will then rise to 1.4 per cent in 2020 and 1.6 per cent in 2021, still below the ECB’s target.
The Bank also announced the interest rate it will charge for its new super-cheap bank loan packages, known as TLTROs, which it hopes will spur financial institutions to lend.
The rate will be set at 10 basis points – or 0.1 per cent – above its main rate over the life of the loan.
It will continue to reinvest the money it receives from the maturing bonds in its asset purchase, or quantitative easing (QE), programme, the Bank said.
Some commentators had been expecting a more dovish move such as a rate cut or a lower TLTRO interest rate.
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said: “For the time being at least, the ECB has resisted taking radical action. But if the economy continues to stagnate, the ECB will be forced to intervene.”
She added: “With rates already at zero per cent and no fiscal levers to pull, options are somewhat limited. Turning the QE taps back on by the end of the year is an increasingly probable scenario.”