Eurozone: ECB holds rates as anticipated
January 19, 2017
The European Central Bank (ECB) decided to hold interest rates, as widely expected, at its 19 January meeting and made no changes to its bond-buying program. The refinancing rate, the marginal lending rate and the deposit facility rate remain at 0.00%, 0.25% and minus 0.40%, respectively.
ECB President Mario Draghi struck a dovish tone at the accompanying press conference and stated that a substantial degree of accommodation is still needed to support inflation in the medium term. Inflation has picked up in recent months in the Eurozone but the uptick is largely due to base effects in energy prices. Draghi also emphasized that the ECB would focus on movements in aggregate Eurozone inflation and not respond to divergent trends seen across countries. The ECB’s ultra-accommodative monetary stance has been criticized, most notably by Germany, which has seen rising inflation.
The ECB provided further details on the modifications made to its asset purchase program in December in a subsequent press release. Specifically, while the ECB modified the program to address the scarcity of assets by removing the deposit floor, the ECB stressed that priority will go to assets above the deposit facility rate. Resilient economic data for the Eurozone has led to speculation over when the bond-buying program will be tapered, but Draghi stressed that tapering had not been discussed at the monetary policy meeting. Moreover, Draghi emphasized that risks for growth are tilted to the downside, although this is largely due to external factors, and that the Bank could increase its bond buying program in size or duration if the outlook for the Eurozone deteriorates. Commenting on his outlook for the program, Andrew Cates, Head of European Economics at Nomura, adds:
“The ECB’s forecasts for eurozone GDP growth and inflation are, in our opinion, too low. Barring a major shock, we believe the ECB will begin to talk more actively about the upside risks to the economic outlook. While an abrupt end or further slowing of the APP is unlikely in 2017, we believe a phased reduction in the monthly pace of asset purchases is likely in 2018.”