Eurozone Monetary Policy


ECB keeps rates on hold while relaxing collateral requirements

At its policy meeting on 6 June, the European Central Bank (ECB) kept the refinancing rate unchanged at 1.00%. The decision, which matched market expectations, represents the sixth consecutive month in which European monetary authorities have left rates unchanged. At its current level, the refinancing rate sits at the record low where it stayed for almost two years until the start of a tightening cycle at the beginning of 2011. In the accompanying statement, monetary authorities noted that "available indicators for the second quarter of the year point to a weakening of growth and highlight prevailing uncertainty". While the ECB continues to expect a gradual recovery of the Euro area economy in the longer run, downside risks to the growth outlook persist, stemming from the tensions in financial markets due to the deepening of the debt crisis in peripheral Euro area economies. Against this backdrop, the ECB sees GDP expanding between -0.5% and 0.3% this year, which is unchanged from the previous projection in March, and between 0.0% and 2.0% in 2013, a narrower range compared to the 0.0%-2.2% previously forecasted. Regarding price developments, the ECB maintained its view that inflation will stay above 2% in 2012 on the back of higher energy prices and recent increases in indirect taxes by national governments, before falling below 2% in early 2013. In fact, the ECB sees inflation within a range of between 2.3% and 2.5% this year (March projection: 2.1% - 2.7%), while expecting inflation to sit between 1.0% and 2.2% next year (March projection: 0.9% - 2.3%). Meanwhile, on 22 June, the ECB announced that it will widen the range of securities that commercial banks can use in order to apply for its loans. The ECB will now accept a range of mortgage - backed securities, car loans and securities backed by loans to small and medium-sized enterprises. The ECB - which had previously broadened the collateral range in December last year - stated that the move will "improve the access of the banking sector to Eurosystem operations in order to further support the provision of credit to households and non-financial corporations." According to market analysts, the decision will provide a relief in particular to Spanish banks, which hold a large quantity of mortgage-backed securities in their balance sheets following the burst of the real-estate bubble.


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