European Central Bank decided that the interest rate on the main operations, marginal lending facility and the deposit facility will remain unchanged at 0.00 percent, 0.25 percent and -0.40 percent respectively - Photo by ECB Office

JAKARTA (TheInsiderStories) – European Central Bank (ECB) kept its benchmark rate at zero level, as it weighs up risks to the economy from Brexit and United States – China trade disputes. Beside, said the President Mario Draghi, the euro zone’ current economic indicators were “weak”.

The Frankfurt-based Bank’ benchmark refinancing rate has now been at zero percent for more than three years, after steadily and swiftly dropping there in the aftermath of the 2007/8 great recession and the eurozone debt woes that followed.

The ECB also announced that it was holding its deposit rate at minus 0.4 percent and the marginal lending rate at plus 0.25 percent. In an official statement, the bank’ 25-member governing council said it expects ECB key interest rates to remain at their present levels at least through the end of 2019 to ensure inflation remains roughly in line with the bank’s annual target of just below 2 percent.

The lender had been planning to raise the rates in the course of 2019 but has been dissuaded by forecasts of far slower global and European growth. The ECB has been forced to backtrack on its plans to tighten monetary policy, amid an intensifying climate of economic gloom.

“The risks surrounding the euro area growth outlook remain tilted to the downside, on account of the persistence of uncertainties related to geopolitical factors, the threat of protectionism and vulnerabilities in emerging markets,” said Draghi.

Followed the Draghi’ comments, Germany’ 10-year Government bond yield, an important benchmark for European fixed-income assets and one that is viewed as a safe haven for investors, dipped into negative territory. The Euro also hit session lows against the dollar, down 0.3 percent, to trade at US$1.1232.

The Eurozone’ central bank also ended its massive bond-buying program back in December. But, a rapid decline in sentiment and weak demand from abroad has ratcheted up the pressure for policymakers to unveil even more stimulus.

Draghi cautiously addressed market speculation about further delays to the central bank’ first post-crisis rate hike and the side effects of years of negative rates on Wednesday.

Meeting earlier than usual so top policymakers can attend the IMF’ Spring Meeting in Washington, D.C., this week, investors were anxious to understand more about the so-called two-tiered system for bank reserves.

Draghi had previously said the ECB must decide whether it needs to mitigate the side-effects of negative rates but insisted on Wednesday that it was too early to decide on a two-tiered system.

This measure aims to protect banks form part of the cost incurred by negative rates — akin to moves taken by central banks in Switzerland and Japan.

The approach would mean that banks are exempted in part from paying the ECB’s -0.40 percent annual charge on their excess reserves. That would boost the banks’ profits at a time when many lenders struggle with low profitability.

Some members of the ECB’ Governing Council are said to be in favor of such a move. However, forthcoming personnel changes at the ECB could risk delaying a discussion about a two-tiered system and the likelihood of an interest rate hike over the coming months.

On Tuesday, the IMF slashed its forecast for global economic growth this year, saying a slowdown could force world leaders to coordinate stimulus measures.

The IMF also sharply downgraded growth in the eurozone. It now expects the bloc to grow at 1.3 percent in 2019 — lower than its forecast had been six months ago.

One example of stimulus introduced by the central bank last month, was a series of quarterly targeted longer-term refinancing operations. The program, which is designed to stimulate bank lending in the eurozone, is set to start in September 2019 and end in March 2021.

However, Draghi warned that the pricing of the operations will take into account a “thorough assessment of the bank-based transmission channel of monetary policy as well as further developments in the economic outlook.” He also added that any information on it will be communicated at forthcoming meetings.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com