The European Central Bank (ECB), led by Mario Draghi, has taken a tiny step closer to reversing support for financial markets, but interest rates will stay low for at least another two years, experts predicted.
After a meeting of its governing council in Estonia, the bank ruled out further interest-rate cuts in a sign it’s moving closer to an exit from its stimulus programme.
The governing council said it now expects borrowing costs to stay at present levels for an extended period but said it stood ready to increase the size or duration of its huge bond-buying programme if the eurozone deteriorates.
“The ECB has, perhaps, nudged itself a little closer towards the end of its easing bias, at least where interest rates are concerned,” said Chris Beauchamp, chief market analyst at online broker IG.
“But, as we learned with the Fed, the end of rate cuts does not mean an immediate shift towards rate hikes.
“QE [quantitative easing] remains, and it is the knowledge this is unchanged which is helping eurozone stocks to hold their ground.”
Capital Economics in London said rates will stay unchanged at historically low levels up to 2019.
“We doubt the ECB’s tweak to its forward guidance will have much of an effect on eurozone financial markets in the medium term,” Capital Economics said. “As we and most others had expected, the ECB dropped its rate cut bias, but kept all other policy settings — and plans for asset purchases in particular — unchanged.
“The immediate market reaction was, unsurprisingly, limited, with only small moves in the euro, eurozone government bonds yields and equities.
“Admittedly, this latest move is probably the first step towards normalisation of ECB policy. This should ultimately support the euro. However, we expect ECB interest rates to remain at current levels until 2019, even longer than is currently discounted in markets, and the Fed to hike rates further and faster than investors currently anticipate.
“So the euro is unlikely to strengthen as a result of narrowing interest rate differentials.”
“There was really no justification for the ECB to keep on holding on to that reference of the possibility of lower rates,” said Vasileios Gkionakis, a strategist at UniCredit. “Nobody really believed that it would actually manifest, and especially now that growth numbers are picking up,” the economists said.
New data showed eurozone GDP rose 0.6% in the first quarter, stronger than initially estimated. Even so, the statement marks only a small step. The deposit rate was kept unchanged at minus 0.4% and the main refinancing rate at zero, and officials still intend to buy €60bn of debt a month until at least the end of the year.
Mr Draghi said the eurozone still is not generating enough inflation, overshadowing improved prospects for the economy.
“We need to be patient,” he said. “We need to continue to accompany the recovery with our monetary policy.”
Additional reporting by Bloomberg
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