As widely anticipated the ECB left key interest rates on hold today. The benchmark refi rate remains at just 0.05 percent, 25 basis points above the minus 0.20 percent deposit rate and 25 basis points below the 0.50 percent marginal lending facility rate.
With the real economy performing much as expected and inflation, despite June's minor setback, at least trending in the right direction, any move this month always was going to be very unlikely. Indeed, central bank chief Draghi's press conference did nothing to suggest an increased likelihood of either a change in interest rates or a modification of the current E60 billion/month QE programme over the foreseeable future. For now at least, the ECB seems to be cautiously happy with the way its monetary stance is impacting growth and prices.
Otherwise the post-meeting conference was most notable for the confirmation that, in the wake of the new bailout deal, the ECB now feels able to increase the ceiling on its Emergency Assistance Liquidity (ELA) loans to Greece. This had been frozen at E89 billion since 28th June. The limit will be raised by E900 million for one week, a vital step if the Greek banking sector is to stay afloat. Draghi also indicated that the central bank would be addressing the current lack of transparency with regards to the communication of the ELA data.
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.
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