The European Central Bank has left interest rates unchanged according to ECB President Mario Draghi, a decision that is in line with market expectations. Destabilizing factors like debt crisis in Italy and the ongoing uncertainty surrounding the UK’s exit from the EU most likely informed monetary policy.
- There has been no change to EU interest rates which remain at the most recent meeting. Rates will be kept on hold throughout 2019.
- The ECB is offering targeted long-term refinancing operations (TLTROs) to banks, a type of loan aimed to maintain a healthy credit flow.
- The technical recession in Italy is likely making it difficult to justify rate hikes, as well as Brexit and the current GDP forecast.
ECB President Mario Draghi addressed a press conference in January 2018 citing geopolitical factors and trade protectionism as negative influences on economic sentiment. Those issues remain unresolved, and EU growth rate forecasts for 2019 have also shrunk considerably in the meantime.
While the ECB predicted a growth rate of 1.7% for 2019 in December, the Q4 2018 figures were lower than anticipated at that time, leading to market expectations for 2019 to decline accordingly.
The OECD stated yesterday that a growth rate of just 1% is likely to occur throughout 2019.
Core inflation is still below the bank’s target range of 2%, with core inflation projections set to hit 1.4% in 2019.
— Holger Zschaepitz (@Schuldensuehner) March 7, 2019
The ECB is giving TLTRO loans to banks in order to maintain a healthy flow of credit in the Eurozone economy. These loans are to prevent a case of a lending crunch in the instance of an not-unlikely economic downturn.
The loans essentially allow banks to actually make money instead of paying interest, provided that the banks are lending within the appropriate economy. Company loans are particularly encouraged in order to foster growth.
Growth in banking lending hit post-crisis highs last year and the ECB has not listed bank funding as a top concern, suggesting that the recent TLTRO schemes have reached the economy.
The most recent ECB announcement describes a new series of two-year TLTROs starting in September. The decision will allow banks roll over €720 billion in ECB loans to prevent a credit squeeze capable of worsening economic conditions.
The ECB bits that matter
(Also ECB confirming that Mario Draghi will go full eight-year term without ever raising rates) pic.twitter.com/Eatrl0MStf
— Lorcan Roche Kelly (@LorcanRK) March 7, 2019
Neil Wilson, chief analyst at Markets.com, foresaw the rate hike decision and commented on the precarious situation the ECB may find itself in after halting its quantitative easing program.
“On rate guidance, it seems appropriate for the ECB to acknowledge that it will not be raising rates until 2020, at the soonest.
Having missed its opportunity to tighten, the ECB is now at risk having to go even deeper and relaunch QE later this year unless the economic data rebounds significantly over the next two quarters. On growth and inflation forecasts, the ECB has to admit that it’s been far too optimistic thus far.”
Naeem Aslam, chief analyst at ThinkMarkets.com, commented on the extreme reaction in the markets following the press conference which could yet deliver more market-moving news.
“ECB delivered fireworks: a new series of TLTROs. Basically acknowledging the slow growth in the eurozone. This announcement made traders go wild and this pushed the euro-dollar price lower.
All eyes will be on Draghi and markets are going to be even more brutal if he delivers any more surprise in his statement. This is because the overnight volatility for euro-dollar pair shows that when traders are not expecting any surprise, and the policymakers play against the odds, the reaction is more ruthless.”
The ECB stated “The governing council now expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.”
Spot gold saw some pressure directly following the announcement which also had an effect on other markets.
The Euro dipped in value against the USD immediately, and all of Europe’s biggest stock markets also saw downward pressure. The UK’s FTSE 100 dipped -0.14%, Germany’s DAX dipped -0.17%, and Frances CAC lost -0.07% while Italy’s FTSE MiB rose 0.73% and Spain’s Ibex climbed 0.5%.
Spot gold is down 0.05% and last traded at $1,284.30/oz, close to the session high of $1,288.86/oz with a low of $1,281.86/oz. The session range shows signs of caution among traders exiting just well before support at the overnight low of $1,280.80/oz and resistance at Wednesday’s high of $1,291.80/oz, and it remains to be seen whether the gold market will make a big move today or not.