EMU: ECB Announcement

Thu Jan 25 06:45:00 CST 2018

Consensus Actual Previous
Change 0bp 0bp 0bp
Level 0.00% 0.00% 0.00%

As widely anticipated, the ECB today announced no changes to either key interest rates or its QE programme. The benchmark refi rate stays at 0.00 percent while the rates on the deposit and marginal lending facilities remain at minus 0.40 percent and 0.25 percent respectively. Similarly, planned net QE asset purchases were left at E30 billion a month through at least September as outlined at last October's meeting.

Crucially too, there was no modification to the central bank's forward guidance which has the ECB expecting key official interest rates to remain at their present levels for an extended period of time, and well past the horizon of the net asset purchases. The monetary authority also restated its preparedness to increase the asset purchase programme (APP) in terms of size and/or duration should the economy underperform. This will disappoint the Council's hawks and market participants hoping for a less accommodative message in respect of the accelerating upswing in the Eurozone real economy.

There was little new of note in ECB Chief Draghi's press conference although, not surprisingly, he did touch on recent exchange rate volatility which he said needs monitoring. Economic risks are still seen as broadly balanced.

In sum, the message from the January meeting was essentially identical to that from December's gathering. The next scheduled policy announcement is on 8th March and core inflation will probably need to be, perhaps significantly, higher if it is not to yield exactly the same result as today.

The European Central Bank (ECB) sets monetary policy for all members of the Eurozone. The highest decision-making body is the Governing Council which comprises the six members of the Executive Board and the nineteen presidents of member central banks. Policy meetings take place roughly every six weeks but, due to the sheer number of participants, a rotation system has been introduced so that the total number of votes is capped at twenty-one. The benchmark interest rate is the rate on the main refinancing operations (refi rate) which sits between the marginal lending facility rate and deposit rate. The ECB's primary objective is price stability, which is based upon a near-2 percent target for the annual inflation rate.

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.