ECB drops guidance on rate cuts in step toward stimulus exit

(iStock)
(iStock)

Frankfurt - The European Central Bank (ECB) ruled out further interest-rate cuts in a sign that it’s moving closer to an exit from its stimulus programme.

The Governing Council, meeting in Tallinn on Thursday, dropped its guidance that rates might fall further, saying only that it now expects borrowing costs to stay at present levels for an extended period. Policy makers reiterated their pledge to increase the size or duration of their bond-buying programme if the economy deteriorates.

While the improving economy has sparked a debate about policy, it wasn’t a certainty how far the ECB would change its guidance at this meeting. President Mario Draghi and his closest allies had sought to talk down expectations for any major shift, arguing the ECB must be extremely cautious in communicating any exit from stimulus amid a lack of convincing inflationary pressure.

“There was really no justification for the ECB to keep on holding on to that reference of the possibility of lower rates,”  Vasileios Gkionakis, a strategist at UniCredit, told Bloomberg Television. “Nobody really believed that it would actually manifest, and especially now that growth numbers are picking up.”

Data on Thursday showed eurozone gross domestic product 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.

The euro fluctuated after the decision and was down 0.28% at $1.1226 at 14:11.

The focus now turns to Draghi’s press conference at 15:30 in the Estonian capital. The ECB chief is expected to say that the risks to the eurozone's recovery are now balanced, and investors will be listening for any signal on when a decision to unwind stimulus might be taken.

In a Bloomberg survey, economists predicted that announcement will most likely come by the Governing Council’s September meeting.

Updated forecasts to be announced by Draghi will show a stronger growth outlook but a weaker inflation picture across the projection horizon, according to eurozone officials familiar with the matter. With price growth estimated at roughly around 1.5% through 2019, compared with a goal of just under 2%, policy makers may hold off on more significant changes until later this year.

Read Fin24's top stories trending on Twitter:

ZAR/USD
16.97
(+0.36)
ZAR/GBP
21.20
(+0.22)
ZAR/EUR
19.19
(-0.20)
ZAR/AUD
11.84
(-0.04)
ZAR/JPY
0.16
(+0.14)
Gold
1784.58
(+0.54)
Silver
18.27
(+1.50)
Platinum
821.00
(+1.54)
Brent Crude
42.85
(0.00)
Palladium
1931.00
(+1.04)
All Share
54846.28
(+0.60)
Top 40
50503.91
(+0.65)
Financial 15
10134.53
(-0.15)
Industrial 25
76434.98
(-0.16)
Resource 10
51142.00
(+2.00)
All JSE data delayed by at least 15 minutes morningstar logo
Company Snapshot
Voting Booth
Please select an option Oops! Something went wrong, please try again later.
Results
I'm not really directly affected
18% - 1650 votes
I am taking a hit, but should be able to recover in the next year
23% - 2171 votes
My finances have been devastated
34% - 3222 votes
It's still too early to know what the full effect will be
25% - 2345 votes
Vote