ECB pushes back rate hike again as outlook darkens

ECB president Mario Draghi told a news conference following the policy announcement that the decisions taken had been unanimous.
ECB president Mario Draghi told a news conference following the policy announcement that the decisions taken had been unanimous.

VILNIUS • The European Central Bank (ECB) pushed back the timing of its first post-crisis interest rate hike again yesterday, and said it would continue paying banks for lending in its latest effort to revive a slowing euro zone economy.

ECB president Mario Draghi said policymakers had addressed the ECB's readiness to act in case of "adverse contingency" and several had raised the possibility in yesterday's discussion of further interest rate cuts or restarting asset purchases.

The moves, bolder than analysts had expected until only a few weeks ago, come as a trade war between the United States and China overshadows the global economy, in particular export-oriented euro zone countries such as Germany.

Mr Draghi told a news conference following the policy announcement that the decisions taken had been unanimous.

Responding to rapidly deteriorating inflation expectations, the ECB pledged to keep its interest rates at their current record-low level, at least through the first half of next year, instead of the end of this year as it had said in March.

Explaining that decision, Mr Draghi said risks to the economy were tilted to the downside.

"The uncertainty about the Brexit negotiations and... the vulnerabilities of certain emerging market countries which are important, and more generally the uncertainty about global trade growth, have extended beyond what we believed in March - and that is why we have extended our forward guidance," Mr Draghi said.

Growth projections by the central bank were revised up to 1.2 per cent for this year but marked down to 1.4 per cent for both next year and 2021.

Inflation forecasts were also tweaked at Mr Philip Lane's first policy meeting as ECB chief economist.

Prices are now seen rising 1.3 per cent this year, 1.4 per cent next year and 1.6 per cent in 2021.

The ECB targets an inflation rate of just below 2 per cent, but it has undershot this since 2013 and projections suggest it will continue to miss it for years to come.

The ECB also said yesterday it will let banks borrow from it at rates just 10 basis points above its minus 0.4 per cent deposit rate, provided they beat the ECB's lending benchmarks in a new targeted longer-term refinancing operation, or TLTRO.

"For banks whose eligible net lending exceeds a benchmark, the rate applied in TLTRO III will be lower, and can be as low as the average interest rate on the deposit facility prevailing over the life of the operation plus 10 basis points," the ECB said in a statement.

With pervasive uncertainty already denting trade, big central banks like the ECB and the US Federal Reserve appear to have given up on plans to tighten policy and markets are now positioned for easing.

REUTERS

A version of this article appeared in the print edition of The Straits Times on June 07, 2019, with the headline 'ECB pushes back rate hike again as outlook darkens'. Print Edition | Subscribe