Wednesday, 15 April 2015

ECB Keeps Rates on Hold as Investors Await Draghi Assurance on QE Path

ECB Chairman Mario Draghi.
Photographer: Andrew Harrer/Bloomberg
by Jeff Black | 3:46 PM GST | April 15, 2015

The European Central Bank kept interest rates unchanged at record lows as it focuses on a bond-buying program to bolster the improving euro-area economy.

The 25-member Governing Council left the main refinancing rate at 0.05 percent at its meeting in Frankfurt on Wednesday, as predicted by all 51 economists in a Bloomberg News survey. The deposit rate and the marginal lending rate stayed at minus 0.2 percent and 0.3 percent, respectively.

Almost six weeks into its 1.1 trillion-euro ($1.2 trillion) quantitative-easing plan, the ECB is claiming some early successes as the economy picks up and lending recovers. When Draghi holds a press conference at 2:30 p.m. in Frankfurt, he may reassure investors there’s no reason to assume the program will stop before the scheduled end-date of September 2016.

“We believe that it is still premature to have a clear idea of the macroeconomic impact, and rumors that the ECB could halt its program soon due to the improving outlook for growth are clearly unjustified,” said Philippe Gudin, chief European economist at Barclays Plc in Paris. “The ECB will probably have to discuss the question of financial stability and will be questioned on the risks related to high asset prices as a result of QE.”
Growth Signs

The ECB embarked last month on its plan to spend 60 billion euros a month on sovereign and private-sector debt. It intends to continue until September next year or until officials “see a sustained adjustment in the path of inflation” toward the medium-term goal of just under 2 percent.

The slide in euro-area consumer prices recorded since December is fading, and economic survey data has signaled the regional recovery is accelerating. The International Monetary Fund increased its economic-growth forecasts for the euro area on Tuesday.

European stocks and bonds have risen. The Stoxx Europe 600 Index closed at a record high on Monday, and Germany’s 10-year bond yield dropped to an all-time low of 0.13 percent on Tuesday.

Investors could still derail the progress if they believe stimulus will decelerate sooner than expected, meaning Draghi might need to play down the idea that the program could succumb to its own effectiveness.

He may point to economic and political risks still clouding the outlook, including Greece’songoing wrangling with creditors over fresh aid. The Governing Council increased the cap on emergency cash for Greek banks by 800 million euros to 74 billion euros on Tuesday to counter deposit outflows spurred by concern the nation will default and exit the currency bloc.

“Draghi’s in a situation where he has to balance the positive message from the data with keeping the expectation that they’d stop QE early contained,” said Nick Matthews, senior European economist at Nomura International Plc in London. “He’ll reinforce that it’s a long road that they’ve only just started on, and they need to keep calm and carry on.”