ECB keeps its interest rate at 0%

The European Central Bank has opted to leave interest rates unchanged

European Central Bank Building                                 

The European Central Bank (ECB) has opted to keep its main refinancing rate at 0.0%.

The latest monetary policy meeting of the ECB's Governing Council also decided to freeze the deposit facility rate at -0.5% and the marginal lending facility, the rate at which banks borrow from the ECB, unchanged at 0.25%.

Inflation rising

The ECB also said it remained committed to purchasing €1.85tn ($2.2tn) of bonds until March 2022.

The bonds were issued as part of its Pandemic Emergency Purchase Program (PEPP) and the ECB said it will continue buying bonds until it feels the crisis is over.

Christine Lagarde, the ECB president, said the bank believed any rise in inflation would be gradual, although she pointed out that inflation was trending upwards.

“Our new staff projections point to a gradual increase in underlying inflation pressures, although the pressures remain subdued in the context of still significant economic slack that will only be absorbed gradually over the projection horizon," she said. 

Wait-and-see policy

Jesus Cabra Guisasola, associate at Validus Risk Management, said the ECB had been expected to maintain its dovish tone.

"While there are clear signals of optimism around the European economy, after a pick-up in vaccinations and falling coronavirus cases, there are still uncertainties surrounding the euro-area and its recovery," he said.  

"The pandemic is leaving a legacy of high debt and weak balance sheets with an uneven recovery between southern and northern European economies. Hence, the ECB prefers to continue with its wait-and-see monetary policy stance and not disrupt the funding market in the short term.  

“An environment where the European economy recovers at different paces with inflation below the 2% target could lead to a weaker euro. Nevertheless, there is a market consensus for a weaker dollar in the coming months and we could see EUR/USD testing 1.25, a level not seen since early 2018.”

No surprises

Adrian Hilton, head of global rates and emerging market debt at Columbia Threadneedle Investments, said there were no big surprises at the ECB meeting, since the market was not expecting any reduction in PEPP purchases.

"Christine Lagarde seemed to describe a Governing Council that is only very cautiously increasing its optimism on the European outlook," he said.

"By tweaking the 2021 and 2022 projections for GDP growth and inflation slightly higher – but leaving the 2023 outlook unchanged – the ECB has signalled that it doesn’t yet see the foundations of a sustained recovery in growth over the longer term, especially while substantial labour market slack remains.

"We know that the European Central Bank is sensitive to the potential tightening of financing conditions via higher market rates. It’s possible that last month’s rise in bond yields, when 10-year bonds briefly threatened to trade with a positive yield, set some nerves jangling at the ECB and keeps them cautious of a premature withdrawal of policy support."

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