Eurozone: ECB stays the course in January
January 25, 2018
The European Central Bank (ECB) decided to hold interest rates unchanged on 25 January, a decision widely expected by market analysts. The main refinancing rate remains at 0.00%, and the marginal lending rate and deposit facility rate at 0.25% and minus 0.40%, respectively. The ECB also made no changes to its bond-buying program, reiterating that the asset purchases program will continue at a pace of EUR 30 billion per month until September or beyond, if necessary. Overall, the Bank’s message regarding its monetary policy stance was unchanged from previous meetings, with ECB President Mario Draghi stressing in the accompanying press conference that underlying inflation in the Eurozone remains subdued, and that interest rates are expected to remain at their current levels for an extended period.
The unchanged tone comes despite a stream of positive economic data for the Eurozone, which is enjoying its brightest growth spell in a decade. Strong economic growth has led to calls for the Bank to unwind its ultra-accommodative monetary policy stance. The minutes from December’s monetary policy meeting revealed that some members of the governing council even wanted Draghi to confirm an end date for the QE program. However, inflation in the Eurozone remains below the Bank’s target of “close to, but below, 2.0%”, and Draghi stated that “domestic price pressures remain muted overall and have yet to show convincing signs of a sustained upward trend”, warranting the need for an accommodative stance. Moreover, the strong euro is complicating the Bank’s policy making. The euro has risen sharply in recent months in part due to a weak U.S. dollar, dampening inflation. Developments in the foreign exchange market could interfere with the Bank meeting its inflation target, despite strong growth within the common-currency bloc.
Looking forward, the vast majority of our analysts expect rates to stay unchanged this year, in line with Draghi’s statement that interest rates will remain at their current levels “for an extended period of time and well past the horizon of our net asset purchases”.
Eurozone Interest Rate Forecast
The Consensus Forecast view is that the policy rate will end the year at 0.01%. For 2019, our panelists see the policy rate ending the year at 0.37%.