There were no surprises in the ECB's policy announcement today which simply confirmed the expected no change in key interest rates. The benchmark refi rate stays at just 0.05 percent and the rates on the deposit and marginal lending facilities remain pegged at -0.20 percent and 0.30 percent respectively.
There was little of any real note in the post-meeting press conference either. As anticipated, the overall tone was cautiously more optimistic than of late in line with the strengthening trend seen in recent real economy and inflation data. Indeed, the ECB Chief even went so far as to describe economic risks as a having become more balanced. In itself this will probably encourage more vocal calls from some quarters for an early curtailment of the QE programme, currently scheduled to run through September 2016. However, such an option was essentially ruled out, at least for now.
With questions surrounding Greece and its possible default deflected and left for the Greek government to address, today's press conference really just signalled more of the same for ECB policy over coming months.
The European Central Bank meets every six weeks to determine the appropriate stance of monetary policy.
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 now meets every six weeks. 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.
Register for regular updates here and manage your email preferences.