EMU: ECB Announcement

Thu Oct 22 06:45:00 CDT 2015

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

As expected, the ECB signalled no changes to key interest rates at its October policy meeting. The benchmark refi rate stays at its record low of 0.05 percent and the rates on the deposit and marginal lending facilities are held at minus 0.20 percent and 0.30 percent respectively.

Since last month's deliberations, headline HICP inflation has dipped back below zero, retail sales stagnated and industrial production fallen for the third time in four months. The more-forward looking data have been less negative but it is clear that Eurozone economic growth remains disappointingly sluggish and, in general, inflation expectations are still too low for comfort. To make matters worse, the global economy is not looking as healthy as it did a short time ago.

Consequently, in the wake of ECB Chief Mario Draghi's apparent pump-priming at September's post-meeting press briefing, a move on rates today was at least a possibility. However, since the lower bound was (supposedly) already reached when the central bank last cut back in September 2014, much more probable was always going to be a boost to the EUR60 billion/month QE programme.

In practice, Draghi indicated that lowering the deposit rate was indeed discussed today suggesting (not for the first time) that the current lower bound may not be the final one. More importantly, he also went about as far as he could without pre-empting the decision in saying that the December meeting would reconsider the policy stance. This would entail making full use of current QE flexibility regarding its size, composition and duration. To this end, upcoming economic data will probably need to be on the firm side of expectations if financial markets are not to be very disappointed with any decision not to ease again at year-end.

Otherwise, the tone of the press conference was dovish and while talking up the positive effects of QE to date, Draghi emphasised ongoing downside risks and the need to address them. Not surprisingly the EUR has weakened on the back of today's announcement and looks likely to remain under downside pressure into December as speculation about more QE continues to build.

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.