The FINANCIAL — The European Central Bank kept its key interest rates unchanged at record lows amid signs that the eurozone’s economy is slowly recovering with consumer prices moving higher, according to Nasdaq.
The ECB on June 3 left its main interest rate—the rate it charges banks for regular loans—at 0.05%, where it has been since last September. Its rate on overnight deposits also remained unchanged at negative 0.20%, meaning that banks pay to leave excess funds with the central bank.
Analysts had widely expected these outcomes.
European markets largely brushed off the decision. The euro, which already slipped earlier in the session after surging more than 2% on Tuesday against the dollar, remained around 0.3% lower on the day at $1.1122 after the announcement.
Financial markets will pay close attention to ECB President Mario Draghi’s post-meeting press conference, due to start at 12:30 GMT, for an update on Greece’s debt negotiations with its international creditors—which include the ECB—and the bank’s view of the recent rise in consumer prices.
Annual inflation was 0.3% in the eurozone last month, according to the European Union’s statistics agency. Though still far below the ECB’s target near 2%, it was the first rise in six months and a big climb from the 0.6% contraction in prices that occurred in January. The report eased concerns that Europe was at risk of a prolonged period of falling prices, known as deflation, that weakens the economy and makes debt servicing harder.
Markets will pay particular attention to the ECB’s inflation forecast for next year and 2017, as it will offer a glimpse into the ECB’s determination to continue with its €60 billion ($66 billion) a month quantitative easing program, known as QE, which should last at least through September 2016.
At the last forecast in March, the ECB said inflation for next year would be 1.5% followed by 1.8% in 2017. Crucially, it said that its forecast was based on “the full implementation” of its policy programs. Should there be a significant increase in either of these two numbers at the press conference, then there will likely also be renewed chatter about when the ECB will start to taper its bond purchase program.
Analysts said, however, that the forecasts won’t spark such a debate just yet and that Mr. Draghi will reaffirm the bank’s intention to fully implement QE through next fall. “We expect the ECB to keep its inflation forecast unchanged at 1.5% in 2016 and 1.8% in 2017,” said analysts at Danske Bank in a recent research note.
The ECB may be winning the fight against deflation, but that would be little consolation if Greece and its creditors fail to reach a deal on the embattled country’s bailout program soon, further jeopardizing Greece’s future in the eurozone.
The ECB has continued to keep Greek banks afloat through an emergency lending scheme under the auspices of the Greek central bank, which charges a higher interest rate than regular ECB operations. The ECB can end the program with a two- thirds vote, but, thus far, has decided to maintain it.
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