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ECB keeps rates on hold

June 2, 2016

The European Central Bank (ECB) has left its benchmark interest rates on hold at historic lows. ECB President Mario Draghi said the central bank expects improving inflation figures and GDP growth in coming years.

Deutschland Eingangsschild Europäische Zentralbank EZB neue Zentrale
Image: Getty Images/AFP/D. Roland

Meeting in Vienna on Thursday, the ECB's rate-setting governing council decided to leave all its key interest rates unchanged. Its main refinancing rate therefore remains unchanged at zero percent, and the marginal lending rate unchanged at 0.25 percent. The rate for overnight deposits with the central bank remained at minus 0.4 percent.

The euro area's central bank has announced plans to start buying corporate sector bonds on June 8, and offer cheap credits to commercial banks under a program called "targeted longer-term refinancing operation" as of June 22. The aim of these programs is to ease credit conditions for non-financial corporations even further, to stimulate investment in new real-economy projects.

Eurozone GDP growth for 2016 is projected by ECB to be 1.6 percent, a revision upward from the previous month's estimate of 1.4 percent, though some risks remain on the downside, Draghi noted, including a risk of Brexit and other geopolitical risks. Growth projections for 2017 and 2018 are currently pegged at 1.7 percent.

Easy credit to continue

Draghi made it clear that accommodative monetary policy would continue - but that it wasn't, by itself, enough to restart Europe's economic engines.

"In order to reap the full benefits from our monetary policy, other policy measures must contribute much more decisively at both national and European levels. Structural reforms are necessary in all Euro area countries, although specific reform needs differ across individual countries," Draghi said. He added that in addition to structural reforms, an "adequate public infrastructure" will be vital to improve business conditions - an oblique way to call on European governments and the EU to spend more public money on infrastructure.

Draghi added that additional economic growth impetus could be expected from further moves to set up a more complete European capital markets union, and from the extension of the "Juncker plan" - also known as EFSI, the European Fund for Strategic Investments - at least through 2018, which was announced by the European Commission this week.

EFSI is aimed at luring private investment into infrastructure projects by providing a "first loss" provision - a system to absorb a first tranche of potential losses through a special fund funded by European governments, thereby de-risking private investments.

Criticism of ECB policy

Asset purchases for growth and higher prices

In 2015, the ECB announced it was buying sovereign eurozone debt to the tune of 1.74 trillion euros ($1.94 trillion) at least until March 2017 to lift growth and boost inflation.

About two months ago, it launched an additional package of measures, expanding its asset purchases to corporate bonds, expanding its monthly level of bond purchases from 60 billion euros to 80 billion euros, and cutting its benchmark interest rate to zero. Moreover, the ECB also introduced negative interest rates for reserve deposits with the central bank, in an effort to punish comercial lenders for parking their cash reserves there instead of lending money to businesses.

Slightly rosier prospects

First-quarter eurzone growth has beaten beating expectations amid rising business sentiment, a surge in investments and stable household consumption.

Draghi unveiled slightly improving inflation and growth outlooks at his news conference on Thursday. Inflation across the Eurozone was at minus 0.1 percent in April, up from minus 0.2 percent in March. ECB's inflation rate projections for this year and the coming two years - defined in technical terms as "HICP", the Harmonised Index of Consumer Prices - is currently 0.2 percent for 2016, 1.3 percent for 2017, and 1.6 percent for 2018.

nz/mrk (AFP, Reuters, dpa)