Thursday, 5 March 2015

ECB Keeps Rates Unchanged as Investors Await QE Details

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ECB Leaves Benchmark Rate Unchanged

by Stefan Riecher | 4:46 AM PST | March 5, 2015

(Bloomberg) -- The European Central Bank kept interest rates unchanged at record lows as investors wait for President Mario Draghi to reveal more details of his 1.1 trillion-euro ($1.2 trillion) bond-buying plan.

The 25-member Governing Council left the main refinancing rate at 0.05 percent at its meeting on Thursday in Nicosia. The decision was predicted by all 54 economists in a Bloomberg News survey. The deposit rate remained at minus 0.2 percent and the marginal lending rate at 0.3 percent.

Draghi is set to unveil the starting date for government-bond purchases and other elements of quantitative easing at his press conference. He’ll also present the ECB’s new growth and inflation forecasts, which will run through 2017 for the first time and help investors judge how long QE might last.

“We have heard very few details as to the operational modalities of the purchases,” said Anthony O’Brien, a fixed-income strategist at Morgan Stanley in London. “We do expect President Draghi to shed more light on the policy framework.”

When the ECB said on Jan. 22 that it’ll start QE, Draghi pledged to buy 60 billion euros of assets a month through September 2016 or until officials see a “sustained adjustment in the path of inflation” toward their goal of just under 2 percent.
Inflation Path

The euro weakened to an 11-year low against the dollar on Thursday, dropping 0.1 percent to $1.1072 at 2:03 p.m. in Frankfurt.

Unknowns include how the ECB will taper the program when needed, and how data on purchases will be made public. Also unresolved are to what extent it’ll purchase bonds with negative yields, and how to treat national central bank losses from buying them.

Draghi will probably also face questions on the Governing Council’s discussions on Greece and Emergency Liquidity Assistance for the nation’s banks.

A credit-rating waiver allowing Greek debt as collateral was lifted on Feb. 4, cutting banks off from regular ECB funding, after the newly elected government under Prime Minister Alexis Tsipras rejected the country’s bailout package. While Greece has since come up with a list of measures for euro-area finance ministers to persuade them to extend the bailout, the crisis might revive as soon as next month when more details are due.
Greek Risk

“The risk remains serious” that Greek leaders “will go too far to placate the most radical parts of their fractious coalition,” said Christian Schulz, an economist at Berenberg Bank in London. There’s “a 25 percent chance that Greece will eventually have to print the money it does not have, and thus exit the euro zone.”

Greece serves as an example that while Draghi’s stimulus plan may be enough to skirt deflation, it doesn’t address the issue of structural reforms. That leaves him continuing to cajole politicians as he deals with the fallout from recurrent financial crises in weak economies.

The risk is that ECB action is simply delaying a day of economic reckoning. From Greece’s attempt to jettison its aid program to French and Italian sluggishness in pushing through reforms, euro-area leaders have shown a reluctance to take the steps the ECB says are essential for sustained growth.

“The ECB is doing what’s needed on the monetary side, but on the political side the clock is ticking,” said Richard Barwell, a senior economist at Royal Bank of Scotland Group Plc in London. “If all goes to plan, the economy will improve at some point and interest rates will rise again. At that point, those countries which have lagged behind on reforms will pay the price and they might drag down the rest of the region.”

To contact the reporter on this story: Stefan Riecher in Frankfurt at

To contact the editors responsible for this story: Fergal O’Brien at Paul Gordon, Zoe Schneeweiss