ECB Hangs Tight On Rates

The European Central Bank has left its key interest rates unchanged as it waits to see whether current record lows will stimulate the tepid recovery in the 19 countries that share the euro currency.

The ECB said Thursday that its 25-member governing council kept its key benchmark at zero. The refinancing rate determines the cost of central bank credit to commercial banks, and through that steers many other short-term lending rates.

The central bank also didn’t touch its rate of minus 0.4 percent on funds left on deposit at the central bank by commercial banks. That highly unusual negative rate is aimed at getting banks to lend the money, not stash it.

Analysts expect ECB head Mario Draghi to stress at a news conference that the bank could add stimulus measures if needed to boost the economy in the 19 countries that use the euro. Taken together, they are the second largest economy in the world after the United States and ahead of China, according to World Bank figures.

In addition to holding interest rates at drastic lows, the eurozone’s chief monetary authority is pumping newly printed money into the banking system by purchasing bonds from banks at the rate of 80 billion euros ($90 billion) per month. It is also planning long-term loans to banks that will earn negative interest — that is, the ECB will pay banks to take the loans instead of the other way around.

Cheap lending rates and infusions of newly created money are aimed at increasing inflation from its current level of zero. That’s regarded as too low for a healthy economy, and it is far from the ECB’s goal of just under 2 percent. More money and credit should also lift growth and reduce unemployment.

Draghi may also answer German criticism of the ECB’s ultra-low rates. Some conservative German politicians have grumbled about the low returns to savers and on pension savings. Finance Minister Wolfgang Schaeuble went so far as to credit half of the support for the anti-euro, anti-immigration Alternative for Germany party to public discontent over ECB policies.

The European Union treaty that created the ECB and the euro forbids the central bank from taking advice from governments, and says that member governments agree to respect that. Political independence shields a central bank from pressure from politicians who may want more expansive monetary policy that could help them get re-elected — but which could cause long-term harm.

The eurozone economy grew 0.3 percent in the fourth quarter of last year; unemployment is high at 10.3 percent but falling slowly, with pockets of much higher joblessness in places like Spain and Greece that have run into trouble with too much debt.


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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell