Eurozone Monetary Policy


Eurozone: ECB raises ELA funding to Greek banks

July 16, 2015

The European Central Bank (ECB) held its fifth monetary policy meeting of the year on 16 July during which it announced that it would maintain the main refinancing rate at 0.05% and leave the deposit rate and the marginal lending rate unchanged at minus 0.20% and 0.30%, respectively. While these decisions were all broadly expected, the ECB surprised the market by announcing that it would throw a fresh lifeline to Greece’s teetering financial sector by increasing its Emergency Liquidity Assistance (ELA) to the country’s banks by EUR 900 million for one week. Market participants had expected that the ECB would not change the EUR 89 billion level that had been in place. The ECB had frozen its ELA to Greece’s banking system at that level shortly after Premier Alexis Tsipras called the referendum. The Bank’s decision to increase its financial aid to Greece comes after the Greek parliament passed the reform legislation needed to pave the way for a new EU bailout on 15 July and after Athens secured bridge finance of about EUR 7.0 billion for three months through the European Commission’s European Financial Stability Mechanism (EFSM). The latter will allow Greece to make the payment of EUR 3.5 billion that is due to the ECB on 20 July.

Regarding the ECB’s non-standard monetary policy measures, the regulator reaffirmed that the asset purchases of EUR 60 billion per month are still proceeding “smoothly”, and that the program is still going to run until the end of end of September 2016 and until monetary authorities see, “a sustained adjustment in the path of inflation that is consistent with our aim of achieving inflation rates below, but close to, 2% over the medium term.”

On the economic side, the ECB stated that the Euro area economy has developed in line with the Bank’s expectations since the previous meeting. GDP growth was confirmed at 0.4% in the first quarter, which marked a mild acceleration over the rate observed in previous quarter. Moreover, the Bank stated that the latest economic information continued to suggest that the Eurozone economy remained on a moderate growth trend in Q2 and that, going forward, the Bank expects the economic recovery to broaden further. The Bank also sees that domestic demand will benefit from the Bank’s monetary policy measures as well as from the fall in oil prices. Regarding the evolution of inflation, the Bank underlined that inflation bottomed out at the outset of the year and that it has been moving back toward positive territory in recent months.

At a press conference following the monetary policy announcement, European monetary authorities focused on answers regarding the Greek situation. The most remarkable statements from ECB President Mario Draghi were the aforementioned decision to increase the ELA for Greek banks, as well as a comment regarding some debt relief to Greece in which he said that, “it is uncontroversial that debt relief is necessary.” In addition, President Draghi said that Greek bonds would become eligible for the ECB’s quantitative easing (QE) program once there is a bailout deal and the ESM has disbursed the first tranche of the money.

Within this setting, almost all FocusEconomics panelists expect the ECB to maintain the policy rate unchanged at the current record-low of 0.05% over the course of the next two years.

Author:, Senior Economist

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Eurozone Monetary Policy Chart

Euro Monetary Policy July 2015

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

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