Eurozone Monetary Policy June 2016


Eurozone: ECB holds rates, takes a wait-and-see approach following March's measures

June 2, 2016

The European Central Bank (ECB) decided to keep the main interest rates unchanged at its 2 June policy meeting, as it takes a wait-and-see approach following March’s slew of easing measures. As a result, the Bank left the refinancing rate, the marginal lending rate and the deposit facility rate at 0.00%, 0.25% and minus 0.40%, respectively. The ECB also maintained its asset purchase program at EUR 80 billion a month.

In the accompanying press conference, ECB President Mario Draghi stressed that the package of measures announced in March is promoting inflation to return to the ECB’s target level of below, but close to 2.0%. Draghi added that the economic recovery continues and that the measures should provide additional stimulus going forward. Although the risks to the bloc’s growth outlook have moderated, the ECB still sees them tilted to the downside, chiefly due to external and geopolitical uncertainties. Accordingly, the ECB updated its GDP and inflation projections, although the revisions were minor. The ECB now sees GDP expanding 1.6% in 2016 (previous projection: +1.4%) and it expects inflation of 0.2% in 2016 (previous projection: 0.1%).

Commenting on non-standard monetary policy measures, the ECB stated that the new targeted longer-term refinancing operations (TLTRO2) will begin on 22 June. Draghi added that the TLTRO2, along with the corporate sector purchase programme (CSPP), will support growth and inflation in the bloc. The TLTRO2s will being the day before the United Kingdom’s referendum on whether to remain in the European Union and should support liquidity in case citizens vote to leave. Draghi commented that the ECB is ready for all outcomes of the referendum.

Looking forward, the ECB kept the door open for additional easing measures. Draghi emphasized that the ECB expects interest rates to, “remain at present or lower levels for an extended period of time.” In addition, the Bank reaffirmed that it would do whatever it takes to bring inflation toward its target by using, “all the instruments available within its mandate.” Commenting on the decision, Pernille Bomholdt Henneberg, Senior Analyst at Danske Bank, adds:

“We still believe that the ECB will have to extend its QE purchases beyond March 2017 as the ECB in our view will not see inflation at a sustainable path towards 2%. We do look for a considerable rise in inflation starting from June this year, but the main driver is the contribution from energy prices and no matter whether the oil price follows our forecast or performs in line with the forward market, the support will fade in Q2 17. (We believe

the ECB will refrain from cutting policy rates again.)”

Within this setting, all of the analysts surveyed by FocusEconomics expect the ECB to keep the policy rate unchanged at the current record-low of 0.00%. For next year, some analysts expect the ECB to gradually lift interest rates. The Consensus view is that the main refinancing rate will end 2017 at 0.01%.


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Eurozone Monetary Policy Chart

Euro Monetary Policy June 2016

Note: ECB Refinancing Rate in %.
Source: European Central Bank (ECB).

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