ECB hints at interest rates to remain at present levels through end-2019

The European Central Bank surprised the financial markets today. The central bank hinted that interest rates are now likely to stay at their present levels at least through the end of this year. Earlier, the ECB had pointed to no expected rate rise “at least through the summer of 2019”. In other words, the first rate rise should not be expected until 2020. In fact, President Draghi stated that policymakers discussed pushing out the guidance to March 2020, noted Lloyds Bank in a research report.

The change was unexpected as policymakers had recently indicated they were satisfied with market pricing for the first rate rise. After today’s announcement, markets have pushed out the first 10 basis points rate rise to end-2020. It’s also a dovish signal in that the ECB’s reinvestments would continue for longer, given that they will continue “past the date when we start raising key ECB interest rates”.

The second noteworthy announcement was confirmation the ECB will launch a new targeted longer-term refinancing operations program (TLTRO-III). The details of the new TLTRO-III are quite patchy; more information would be provided later. What is known that there would be a series of quarterly liquidity provisions; however, they will not begin until September. That seems slightly odd as the ‘cliff effects’ for banks will occur in June.

The policy decisions made today were unanimous, according to President Draghi; however, there was no discussion of restarting QE.

Supporting them were considerable downward revisions to growth in 2019, from 1.7 percent to 1.1 percent and a slight revision for 2020 to 1.6 percent from 1.7 percent. The growth forecast for 2021 was unchanged at 1.5 percent. The quarterly profile indicates the first quarter 2019 growth remaining weak at 0.2 percent, before edging higher to 0.3 percent in the second quarter and 0.4 percent thereafter. Therefore, the ECB highlighted the persistence of economic uncertainty, but is cautiously expecting a rebound later in 2019.

“The weaker near-term growth profile led to downward revision to the ECB’s CPI inflation forecasts over the forecast period. It now projects headline CPI at only 1.2 percent this year (down from 1.6 percent), rising to 1.5 percent in 2020 (1.7 percent previously) and 1.6 percent in 2021 (1.8 percent previously)”, said Lloyds Bank.

At 18:00 GMT the FxWirePro's Hourly Strength Index of Euro was slightly bearish at -56.0932, while the FxWirePro's Hourly Strength Index of US Dollar was bullish at 76.9745 more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex