Frankfurt, The European Central Bank (ECB) has kept key interest rates for the euro area unchanged but revised forward guidance to open doors for possible monetary policy easing.
The central bank said in its latest policy decision statement on Thursday that it expects the key interest rates to remain “at their present or lower levels” at least through the first half of 2020, a slight shift from the June 6 statement that used the wording “at their present levels” only, Xinhua reported.
The central bank underlined the need for “a highly accommodative stance” of monetary policy for a prolonged period of time since “inflation rates, both realised and projected, have been persistently below levels that are in line with its aim.”
It is “determined to act” if the medium-term inflation outlook continues to fall short of its aim and will stand ready to “adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner,” it added.
The ECB also said it has tasked relevant Eurosystem Committees with examining mitigating measures “such as the design of a tiered system for reserve remuneration, and options “for the size and composition of potential new net asset purchases,” which is largely in line with market expectations.
The eurozone base interest rate will remain at 0.00 per cent, with the marginal lending rate and deposit rate staying at 0.25 per cent and minus 0.40 per cent respectively, according to the central bank.
Inflation in the euro area has been stubbornly low. Annual inflation rate was 1.3 per cent in June, up from 1.2 per cent in May, still falling short of the ECB’s aim of just under 2 per cent.
“We don’t like what we see,” ECB President Mario Draghi told a press conference on Thursday, noting that the ECB is determined to act.
Draghi said weak international trade and “prolonged presence” of global uncertainties weighed down on Eurozone economic outlook, including now the possibility of a hard Brexit. He said a previously anticipated rebound in the second half this year “becomes less likely,” but the risk for recession is also pretty low, citing signs of resilience in the labor market.
Draghi described weak manufacturing in Germany and Italy a result of “idiosyncratic shocks”, and believed fiscal policy will be essential if the situation is getting worse, given the fact that a lot has been done in the monetary policy.
The support from fiscal policy will allow monetary policy to do what it does “with less side effect and faster,” he said.
Draghi also dismissed concerns over competitive depreciation, saying the international consensus of avoiding that is the pillar of the current multilateral system.
Thursday’s decision came after Draghi signaled possibility of tilting towards dovish policy in June on an ECB forum in Sintra, Portugal. Analysts believe that the ECB is paving the way for a package of actions in its September meeting.
A dozens of central banks around the world adopted monetary policy easing this year. A recent case is South Korea’s central bank, which last week unexpectedly lowered its policy rate. The market also believes Federal Reserve would lower interest rates in a meeting next week.
The ECB last cut interest rates in March 2016, adopting the current deposit rate of minus 0.4 percent.
Lenders have worried ultra low interest rates would hurt their profitability. Deustche Bank, Germany’s largest commercial bank expressed such concerns in its interim report released Wednesday.
Thursday’s statement reaffirms expectations that the ECB might follow suit to introduce a “tiered” system as other central banks with negative rate have been doing, under which some deposits could be exempted or charged a different rate.
The outgoing ECB President will be succeeded by Christine Lagarde in October, whom he backed at the press conference saying she will be “an outstanding president of the ECB”.
