ECB keeps interest rates on hold

Posted on July 21, 2016

The European Central Bank (ECB) headquarters is pictured in Frankfurt January 21, 2015. REUTERS/Kai Pfaffenbach/File Photo GLOBAL BUSINESS WEEK AHEAD PACKAGE - SEARCH "BUSINESS WEEK AHEAD JULY 18" FOR ALL IMAGES©Reuters

The European Central Bank has left interest rates unchanged at its first policy vote following the UK’s decision to quit the EU, with analysts on the lookout for clues from Mario Draghi about possible action in September in response to Brexit.

For now the ECB’s governing council has kept its benchmark main refinancing rate at zero and the deposit rate at minus 0.4 per cent, in effect imposing a levy on lenders’ reserves parked at central banks in the eurozone. The decisions were widely expected.

    The bar for more rate cuts is high but a Thursday press conference by the ECB president could shed light on other measures his council could take should the economic fallout from Brexit threaten the eurozone’s recovery.

    Mr Draghi meets the press at 1.30pm UK time. He is likely to say it remains too early to know just how Britain’s vote to break ties with the EU will affect the economy of the single currency area.

    The ECB’s economists will wait until after the governing council’s next policy vote in early September to unveil a fresh set of forecasts for growth and inflation. Most analysts expect downgrades to projections for growth — and new measures from the governing council — after that meeting.

    But Mr Draghi could address concerns before then that the ECB is short of tools to address a downturn in the region’s recovery.

    The governing council was also expected to discuss on Thursday how to soothe fears that the ECB could run out of bonds to purchase as part of its landmark quantitative easing programme, which involves buying €80bn of debt a month.

    A Brexit-induced flight to safety has heightened fears that central bankers in some economies will find themselves unable to buy enough assets to complete the QE programme.

    Eurozone central banks have already struggled to buy sufficient bonds at prices that meet the ECB’s rules.

    In Germany, more than half of government bonds are now too expensive for the Bundesbank to buy, with yields below the ECB’s self-imposed floor of minus 0.4 per cent.

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    An employee shows fifty-euro notes in a bank in Sarajevo in this March 19, 2012 file photo. The European Central Bank took the ultimate policy leap on on January 22, 2015 launching a government bond-buying programme which will pump hundreds of billions of new money into a sagging euro zone economy. The Europen Central Bank (ECB) said it would buy government bonds from this March until the end of September 2016 despite opposition from Germany's Bundesbank and concerns in Berlin that it could allow spendthrift countries to slacken economic reforms. Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing programme will pump 60 billion euros a month into the economy, ECB President Mario Draghi said. Picture taken March 19, 2012. REUTERS/Dado Ruvic (BOSNIA AND HERZEGOVINA - Tags: BUSINESS)

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    Britain’s decision to quit the EU has also raised the chances that policymakers will extend the programme beyond the current deadline of March 2017.

    Confidence among consumers in the eurozone fell in July following Britain’s June 23 referendum.

    The European Commission’s measure of consumer confidence in the eurozone fell from minus 7.2 in June to minus 7.9 in July, remaining slightly better than the minus 8 figure that economists had predicted.

    PwC, the professional services group, said on Thursday that it thought Ireland and Cyprus were the most exposed of the eurozone countries to the fallout from Brexit from a trade perspective.

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