ECB holds rate steady as expected

ECB meeting coincides with a surge in benchmark bond yields beyond eight per cent in Portugal, unsettling financial markets

PUBLISHED : Thursday, 04 July, 2013, 12:53pm
UPDATED : Thursday, 04 July, 2013, 9:45pm
AFP

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The European Central Bank on Thursday held its key rates unchanged, as widely expected, at its regular monthly policy meeting.

The ECB’s governing council voted to keep the bank’s key “refi” refinancing rate steady at an all-time low of 0.50 per cent, it said in a statement.

The central bank also left its other two rates – the deposit rate and the marginal lending rate – at zero per cent and 1.0 per cent respectively.

No analysts or ECB watchers had been expecting the central bank to announce any further policy moves this month after paring back the refi rate by a quarter of a percentage point in May.

ECB chief Mario Draghi was scheduled to explain the reasoning behind the decision at his regular monthly post-meeting news conference.

But analysts said they would be listening out for what Draghi said about the political crisis in Portugal and the recent reemergence of tensions on the financial markets.

Financial markets have been spooked by the announcement last month that the US Federal Reserve is preparing to phase out its bond-buying or so-called “quantitative easing” programme, bringing the prolonged period of loose monetary policy to an end.

In response, sovereigns yields have risen across the euro area and financial conditions have generally tightened, albeit not dramatically.

It was enough, however, to draw top ECB officials into publicly proclaiming that the period of low interest rates is not going to come to an end on this side of the Atlantic.

Central banks in the industrialised world have been keeping interest rates at all-time lows, thereby lending money cheaply, in a bid to stimulate the ailing economy.

The decision to hold rates steady “was wholly expected in the light of the recent modest improvement in some euro zone activity indicators,” said Capital Economics economist Jonathan Loynes.

“The key question now is whether Draghi will join the US Federal Reserve and the Bank of England in providing some form of forward guidance on policy in order to prevent the recent rise in market rates and bond yields from snuffing out the nascent recovery,” the expert said.

The ECB’s mantra in the past has always been that it never “pre-commits” to policy moves.

“But Draghi has been softer on that stance than his predecessor (Jean-Claude) Trichet and has already provided general assurances that any policy ‘exit’ is a long way off,” Loynes said.

“However, that hasn’t prevented market rates from rising thus far so rather stronger guidance – either on the future path of interest rates or on the likely implementation of the OMT bond-buying programme – may well be needed to prevent market pressures from rising further,” he added.

Newedge Strategy analyst Annalisa Piazza also believed that “no additional non-standard measures are expected to be announced today.”

Nevertheless “policymakers have increasing concerns about the effects of rising market rates on their past policy accommodation. Communication tools are probably going to be the first ECB step in the attempt to put a lid on recent spike in short rates,” Piazza said.

 

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