To nobody's surprise the ECB announced no changes to key interest rates at its June policy-setting meeting. The benchmark refi rate stays at just 0.05 percent while the rates on the deposit and marginal lending facilities remain at minus 0.2 percent and 0.3 percent respectively.
Today's decision follows confirmation of a modest acceleration in growth at the start of the year as well as a fourth consecutive monthly increase in HICP inflation. However, first quarter GDP was still only sluggish and the current quarter is shaping up little better. Moreover, despite its rise, inflation has only just returned to positive territory and remains well short of its near-2 percent target mark. Money supply continues to accelerate but the key lending counterpart actually slowed in April and shows no increase from a year ago.
All of which is consistent with the ECB adhering to its current plan of buying some E60 billion a month of public and private sector assets through September next year with a degree of front-end loading as already indicated.
There was little fresh news in ECB Chief Draghi's press conference which indicated that the central bank saw the Eurozone economy evolving broadly in line with its own expectations. However, Draghi did acknowledge that some of the second quarter statistics to date had been slightly on the soft side. In any event, with Greece rapidly running out of money, the main interest in was inevitably in any news on how the negotiations with the country's creditors are going. A potentially default-inducing E300 million loan repayment to the IMF is due on Friday. However, the central bank boss effectively refused to comment on the issue. Greek developments permitting, ECB policy looks on hold at least through year-end.
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.