ECB leaves rates unchanged, warns of possible downside risks

The European Central Bank, at its policy meeting yesterday, left interest rates unchanged, while sounding cautious on the outlook for the Euro zone, which faces downside risks from global threats, especially the "Brexit" referendum.

The ECB left the rate on bank overnight deposits at -0.4 percent, the main refinancing rate at 0.00 percent and the rate on the marginal lending facility at 0.25 percent.

ECB President Mario Draghi in his speech at the policy meeting today, warned investors of a possible threat if a 'vote out' comes in for Britain, while he also left doors open to adopting possible action if inflation remains below target. This, in fact, seems a strong possibility, given the ECB’s latest forecasts.

However, investors seem disappointed by Draghi’s comments. The benchmark Euro Stoxx 50 rose 0.5 percent to reach 3,048, recovering post his speech. The euro traded in a tight range around USD1.1152. The yield on the 10-year German bunds hovered around 0.11.

However, the recent rise in energy prices has failed to raise the inflation forecasts of ECB’ economists. They have hardly raised this year’s projections, while leaving forecasts for 2017 and 2018 unchanged, as well. This is a clear indication that further stimuli will be needed to meet the inflation target of 2 percent in the coming months.

The central bank’s latest quarterly economic forecasts, published on Thursday, indicated that fresh stimulus remains a distinct possibility. Euro zone inflation is likely to edge up only gradually, to 1.6 percent in 2018 from 0.2 percent this year, still far below the target, the central bank added.

Meanwhile, the Oil and Petroleum Exporting Countries discontinued the meeting without reaching any agreement on oil production, which may have further bolstered energy prices, pushing inflation to reach a near target.