EMU: ECB Announcement

Thu Mar 05 06:45:00 CST 2015

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 0.05% 0.05% 0.05%

The ECB's March interest announcement was the expected non-event as the central bank simply confirmed no change in benchmark rates. The key refi rate remains at just 0.05 percent between the deposit rate (minus 0.20 percent) and the marginal lending facility rate (0.30 percent).

Rather, the main focus today was always going to be central bank President Draghi's press conference for the anticipated particulars on how the QE programme announced in January will work together with updated staff economic forecasts. With regards to the former, monthly bond purchases (private and public) totalling some E60 billion will begin next week (9th March) and, as previously signalled, run at least through September 2016 and longer if deemed necessary. However, details of the bond auctions will not be made available until later today.

The new economic forecasts show a notably more optimistic view than in December but crucially, the midpoint of the HICP inflation range is still seen below 2 percent throughout the projection horizon, now extended to 2017. This suggests that policy will retain a dovish bias. Expected growth has been revised up by 0.5 percentage points to 1.5 percent this year and by 0.4 percentage points to 1.9 percent in 2016. The first call on 2017 is 2.1 percent. Anticipated inflation has been shaved from 0.7 percent to 0.0 percent this year on weaker oil prices but is put 0.2 percentage points higher at 1.5 percent in 2016. The following year is marked at 1.8 percent.

Ironically the long awaited launch of QE comes just as the Eurozone economy has finally starting to show some signs of meaningful growth, notably in the key household spending sector. Inflation in February (flash estimate minus 0.3 percent annual rate) saw its first increase in four months and even M3 is expanding at its fastest pace since April 2009. Still, the big picture remains worrying weak and a sustainable economic recovery will probably need all the help it can get.

Key to ECB policymaking over coming months will be the performance of some of the soft data; notably the PMI reports and the EU Commission's economic sentiment surveys. These will provide a timely and broad-based assessment of both current and expected developments in the real economy and inflation. That said, with ECB policy now seemingly set well into next year, upcoming monetary policy decisions should not carry the same market moving potential that they have in recent times.

The European Central Bank announces its monetary policy with regard to interest rates and any other major policy initiatives usually during the first of its two meetings held each month.

The European Central Bank determines interest rate policy at their Governing Council meetings. The Council is composed of the six members of the Executive Council and 17 presidents of member central banks (Bank of France, Bundesbank, etc). The Governing Council meets twice monthly (usually the first and third Thursdays of the month). Monetary policy issues are generally discussed only at the first meeting of the month. The European Central Bank has an established inflation ceiling of just less than 2 percent. The ECB's measure of inflation is the harmonized index of consumer prices (HICP). Each member of the Governing Council has one vote and decisions are reached by simple majority. In the event of a tie, the President has the casting vote. No minutes are released so how individual members voted is not known.

As in the United States, European market participants speculate about the possibility of an interest rate change at these meetings. If the outcome is different from expectations, the impact on European markets can be dramatic and far-reaching. The rate set by the ECB serves as a benchmark for all other interest rates in the Eurozone.

The level of interest rates affects the economy. Higher interest rates tend to slow economic activity; lower interest rates stimulate economic activity. Either way, interest rates influence the sales environment. In the consumer sector, few homes or cars will be purchased when interest rates rise. Furthermore, interest rate costs are a significant factor for many businesses, particularly for companies with high debt loads or who have to finance high inventory levels. This interest cost has a direct impact on corporate profits. The bottom line is that higher interest rates are bearish for the stock market, while lower interest rates are bullish.