ECB pushes out first postcrisis rate hike to 2020

The European Central Bank is to keep interest rates on hold until 2020 and has made a fresh offer of cheap funding for the region's banks in a stark response by policymakers to faltering euro-zone growth.

In a move that took markets by surprise, the ECB said on Thursday it would hold another series of auctions of multiyear loans to banks at low rates in an attempt to support growth.

Mario Draghi, ECB president, said in a press conference that the economy was "in a period of continued weakness and pervasive uncertainty".

The stimulus for banks, dubbed Targeted Longer-Term Refinancing Operations, was announced just three months after the ECB called a halt to its €2.6 trillion programme of buying a range of bonds to try to lift the euro zone out of its financial crisis.

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The bank said the new series of quarterly targeted longer-term refinancing operations would start this September and ending in March 2021. Each operation will have a two-year maturity.

After the central bank’s announcement, the euro slipped by as much as 0.6 per cent to a session low of $1.1243, a level last touched in mid-February. Against sterling, it was trading at 85.76p, down 0.1 per cent.

Boosted

Financial shares were boosted. The Stoxx index tracking the region’s banks - the main beneficiaries of the low-rate refinancing scheme – rose 0.1 per cent, having been down as much as 0.7 per cent.

Euro-zone bonds also rallied, sending their yields lower. Demand for Italy’s shorter dated debt sent the yield on its two-year paper to its lowest level since May 2018, down 14 basis points to 0.128 per cent. The German 10-year Bund yield fell 3bp to 0.10 per cent.

The ECB held its benchmark main refinancing rate at zero and kept the deposit rate at minus 0.4 per cent. It also changed its statement on interest rates, saying they would stay at record lows “at least through the end of 2019”. It had previously said that rates were expected to remain on hold at least through the summer.

The ECB’s council said it would continue to reinvest the proceeds of bonds maturing under its € 2.6 trillion quantitative easing programme “in full” and for “an extended period of time” past the date when euro-zone interest rates begin to rise.

The set of measures went beyond what most investors expected and reveal the central bank’s concern over the way growth in the euro zone has tailed off.

The region has relied heavily on exports, and concerns over global trade battles and Brexit have weighed on its economic performance.

Recession

Italy, the region's third-largest economy, is in recession and even Germany, the motor of the economy, narrowly avoided recession at the end of 2018.

“This certainly goes further than most of us thought that the ECB would,” said Paul Diggle, senior economist at Aberdeen Standard Investments.

“At this stage it is about as far as the ECB will go towards admitting that the European economy faces some serious headwinds in the months ahead. Markets are going to cheer the response from the ECB with the euro selling off and bond yields and equity markets rallying.”

ECB officials still hope that the slowdown will be temporary, pointing to a strong labour market, a slight rise in government spending and a series of one-off factors affecting German industry last year as signs that the economic data could soon improve. – Copyright The Financial Times Limited 2019