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Apr 10, 2019

Monetary Policy | European Central Bank holds interest rates amid gloomy economic outlook.

Sam Meredith




Mario Draghi ECB 190410 EU
European Central Bank President Mario Draghi arrives for the European Council Summit in Brussels, Belgium, on March 22, 2019.
JULIEN WARNAND | AFP | Getty Images
The European Central Bank (ECB) held interest rates steady on Wednesday, shortly after the International Monetary Fund (IMF) sharply downgraded its economic growth forecast for the euro zone economy.
The ECB has been forced to backtrack its plans to tighten monetary policy in recent weeks, amid an intensifying climate of economic gloom.
The central bank unveiled a series of fresh stimulus measures last month, and market participants will be closely monitoring comments from ECB President Mario Draghi at around 1:30 p.m. London time.
Interest rates on its marginal lending facility and deposit facility will remain unchanged at 0%, 0.25% and -0.40%, respectively. These have been at record lows following the euro sovereign debt crisis of 2011 in an effort to boost inflation and stimulate growth.
The euro zone’s central bank, for those nations that share the single currency, ended its massive bond-buying program back in December. But, a rapid decline in sentiment and weak demand from abroad has ratcheted up the pressure for policymakers to unveil even more stimulus.
Two-tiered system
ECB policymakers are expected to address market speculation about further delays to their first post-crisis rate hike and the side effects of years of negative rates.
On Tuesday, the IMF slashed its forecast for global economic growth this year, saying a slowdown could force world leaders to coordinate stimulus measures.
The IMF also sharply downgraded growth in the euro zone. It now expects the bloc to grow at 1.3% in 2019 — 0.6% lower than its forecast had been six months ago.
The stars of the European Union sit on banners flying outside the European Central Bank headquarters in Frankfurt, Germany, on July 20, 2017.
Krisztian Bocsi | Bloomberg | Getty Images
Meeting earlier than usual so top policymakers can attend the IMF’s Spring meeting in Washington D.C. this week, investors are anxious to understand more about the so-called two-tiered system for bank reserves.
Draghi has already said the ECB must decide whether it needs to mitigate the side-effects of negative rates.
As such, one option under consideration is a tiered deposit rate. This aims to protect banks from part of the cost incurred by negative rates — akin to moves taken by central banks in Switzerland and Japan.
The approach would mean that banks are exempted in part from paying the ECB’s -0.40% annual charge on their excess reserves. That would boost the banks’ profits at a time when many lenders struggle with low profitability.
Some members of the ECB’s Governing Council are said to be in favor of such a move.
However, forthcoming personnel changes at the ECB could risk delaying a discussion about a two-tiered system and the likelihood of an interest rate hike over the coming months.
Alongside ECB Chief Economist Peter Praet, Draghi is scheduled to step down in October and policymakers are thought to be reluctant to negotiate a fundamental revamp of monetary policy before new leaders take charge.
TLTROs
One example of stimulus introduced by the central bank last month was a series of quarterly targeted longer-term refinancing operations (TLTRO-III). The program, which is designed to stimulate bank lending in the euro zone, is set to start in September 2019 and end in March 2021.
The TLTROs are loans that the ECB provides at cheap rates to banks in the euro area. As a result, lenders are able to provide better credit conditions to customers, which in turn stimulates the real economy.
This mechanism was first introduced in 2014, before being brought in for a second time in March 2016.
— CNBC’s Silvia Amaro contributed to this report.

Source: CNBC

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