JAKARTA (TheInsiderStories) – The European Central Bank (ECB) has taken action to support the economy in the 19-countries eurozone, joining other major central banks like the United States (US) Federal Reserve, to responding the fears about global growth.
In an official statement after the meeting on Thursday (05/6), the president Mario Draghi said it would extend the earliest date for an interest rate increase from year-end to mid-2020. Its benchmark rates are currently at record lows.
Forward guidance on rates was pushed forward to “at least through the first half of 2020”, from “at least until the end of 2019.” The pricing of a new series of cheap bank funding (TLTRO III) was set to 10 basis point above the MRO and 10bp above the deposit rate for banks reaching the ECB’s benchmark for net lending. So, currently at -0.3 percent.
“We expects the key interest rates to remain at the present levels at least through the first half of 2020, 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 percent over the medium term,” said Draghi.
In a news conference on Thursday, he said, the risks still pointed to the “downside,” citing risks from protectionism, troubles in emerging markets, and uncertainty about how Britain will leave the European Union (EU).
Draghi opined, trade tensions that hit the global economy have prompted monetary policy makers to move towards easing. As an example, for the first time since 2016, Australia was reduced its benchmark rates on June 4 and for a third time this year India cut the rates on June 6. While US’ Federal Reserves chairman Jerome Powell shifted closer to acting.
Draghi said ECB downgraded their outlook for growth and inflation for next year. The eurozone economy is now seen expanding 1.4 percent in 2020 compared with a March’ forecast at 1.6 percent. Inflation is seen at 1.3 percent this year, 1.4 percent next year and 1.6 percent in 2021 – well below target.
The long-term bank loans will start in September and initially be priced at the main refinancing rate plus 0.1 percentage point. They can fall as low as the deposit rate plus 0.1 percentage point if banks meet lending benchmarks. The main refinancing rate is currently zero, and the deposit rate is minus 0.4 percent.
Market-based inflation expectations are at their lowest since 2016, a trend that Draghi noted policymakers take seriously while stressing that there is no threat of deflation and a very low probability of recession.
Markets “might see a much broader phenomenon, where the multilateral order that we have lived in since World War II” is disappearing, he said. “And then, of course, the uncertainty about Brexit negotiations, the uncertainty of vulnerabilities of certain emerging-market countries, which are important.”
As a result, the economic horizon was mixed. The ECB improved by 0.1 percent its GDP forecast for this year to 1.2 percent, compared with March projections, but cut the growth rate by 0.2 percent for next year to 1.4 percent, and by 0.1 percent to 1.4 percent for 2021.
Draghi said the conditions were not comparable with those seven years ago when he said he would do “whatever it takes” to save the common currency in the worst moment of the euro crisis.
He referred to the current growth expansion in the euro area (1.2 percent this year) and low unemployment level (7.6 percent in April). Although inflation remains well below the 2 percent target (1.2 percent in May), he said there was “no probability” of deflation at this stage.
Written by Lexy Nantu, Email: email@example.com