ECB holds rates but is open to further stimulus if needed

Too early now to ascertain full impact of Brexit, says president

The European Central Bank leaves interest rates unchanged as expected, holding them at record lows as it seeks to revive growth and inflation with cheap credit to the economy.
ECB President Mario Draghi.
ECB President Mario Draghi.

FRANKFURT • The European Central Bank kept its interest rates and policy plans unchanged yesterday and said the immediate stress caused to markets by Britain's shock vote to leave the European Union had been contained.

ECB president Mario Draghi said it was too early to ascertain the full impact of Brexit, and underlined that the euro zone's central bank was prepared to take more actions to lift inflation and economic growth if necessary.

"The risks to the euro zone economy remain tilted to the downside," he told a news conference after the ECB left rates and other measures unchanged.

It kept its deposit rate at minus 0.4 per cent and the main refinancing rate at 0.00 per cent, both record lows, as it seeks to cut borrowing costs for firms and force banks to lend money out rather than park cash with it.

The bank said rates would stay at present or lower levels for an extended period, and well beyond the current period in which it is buying assets to boost inflation and pump money into the euro zone's underperforming economy.

It repeated that its €80 billion (S$119.7 billion) per month asset- buying programme - which Mr Draghi deemed "quite successful"- would run until March next year or beyond if necessary, until it sees an upward adjustment of inflation towards its target.


The risks to the euro zone economy remain tilted to the downside.


Overall, the ECB is buying €1.74 trillion worth of assets to cut borrowing costs, induce spending, lift growth and ultimately raise inflation, which has been stuck either side of zero for the past two years.

But such generosity in monetary policy is bumping up against limits. Mr Draghi has consistently called on euro zone governments to loosen their spending to help out, but to no avail.

The ECB is running out of qualified assets to buy, particularly German government debt, as yields have fallen below its deposit rate, a self-imposed limit for its buys.

Though German yields have risen sharply over the past week, around 55 per cent of its bonds trade below the deposit rate, making them ineligible for ECB purchases.

Mr Draghi said policymakers had not discussed tweaking the rules, preferring to wait to see what new staff economic projections due in September say.

The euro rose to hit a day's high against the US dollar, after his announcement.

The single currency climbed against a majority of its 16 major counterparts, advancing from its weakest level versus the greenback since June 27. It was trading US$1.1048 as of 1.48 pm London time. The currency had declined 3.3 per cent from the UK referendum vote to Wednesday, amid speculation that Mr Draghi would ease monetary policy further as they struggle to move inflation towards 2 per cent.

Mr Alvin T. Tan, a London-based foreign-exchange strategist at Societe Generale, said "basically, nothing major has been announced at all", while investors may have envisioned some kind of "tinkering" with the asset-purchase programme,.

"The market was thinking they might increase the pool of assets, for example by tweaking some of the limits they have."


A version of this article appeared in the print edition of The Straits Times on July 22, 2016, with the headline 'ECB holds rates but is open to further stimulus if needed'. Print Edition | Subscribe