ECB Will Keep Record-Low Rates for Longer Amid Inflation Slump
Pledge on low rates extended, details on bank loans unveiled.
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The European Central Bank stepped up support for the euro-area economy by extending its pledge to keep interest rates at record lows, while also reaching agreement on how to infuse lenders with more cheap cash.
Some investors expressed disappointment with President Mario Draghi and colleagues for not doing more in a week when global central banks including the Federal Reserve turned more dovish. German bond yields and the euro rose. Still, bank stocks gained on the new loan details.
The Governing Council, which met in Vilnius, now expects borrowing costs to stay on hold at least through the first half of 2020, or six months longer than previously. The cost of long-term bank loans can fall as low as the deposit rate, currently minus 0.4%, plus 0.1 percentage point.
“The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.”
- ECB statement
Central banks elsewhere have turned to easing measures as the global economy is buffeted by trade tensions. Australia reduced rates on Tuesday for the first time in three years and India cut for a third time this year on Thursday, while Fed Chairman Jerome Powell shifted closer to acting in the U.S.
Draghi will hold a press conference at 3:30 p.m. Vilnius time to present updated economic forecasts and elaborate on the Governing Council’s discussions.
Follow our live blog on the ECB decision and press conference
Policy makers also agreed on the terms for a new round of long-term loans to banks, which will be offered starting in September. The long-term loans to banks will initially be priced at the main refinancing rate plus 0.1 percentage point, but can fall lower if banks meet lending quotas, according to the statement.
The ECB’s actions might be the last salvo for Draghi, who retires in October. A decision on his successor has yet to emerge from haggling among European politicians.
Recent euro-zone economic data have been mixed, and in some cases signal the slowdown may be bottoming out. Figures on Thursday morning showed German factory orders rising for a second straight month in April, and euro-zone GDP was confirmed as being fairly robust in the first quarter, led by investment and household spending.
Still, inflation has weakened and market-based inflation expectations are at their lowest since 2016. Before Thursday’s meeting, investors were betting on a cut in the deposit rate next year, and some economists suggested QE could be restarted.
--With assistance from Fergal O'Brien, Jana Randow, Zoe Schneeweiss, Lukas Strobl, Iain Rogers, David Goodman, Jill Ward, Catherine Bosley, Carolynn Look, William Horobin, Milda Seputyte, Jeannette Neumann, Catarina Saraiva and Kristian Siedenburg.
To contact the reporter on this story: Piotr Skolimowski in Frankfurt at pskolimowski@bloomberg.net
To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Brian Swint
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