ECB Keeps Rate Policy, Stimulus Program Unchanged While Monitoring Low Inflation, Rising Euro Currency

The European Central Bank kept interest rates unchanged at record lows on Thursday. Specifically, the rates on the ECB’s main refinancing operations, marginal lending facility and deposit facility stayed unchanged at zero, 0.25% and minus-0.5%, respectively.

The ECB also maintained its COVID-19 stimulus buying program at the same of 1.35 trillion euro ($1.6 trillion) level. This purchase program is expected to last until June 2021 at least – although some analysts believe the amount will increase.

“These purchases contribute to easing the overall monetary policy stance, thereby helping to offset the downward impact of the pandemic on the projected path of inflation,” the ECB said in a statement.

Frederik Ducrozet, senior economist at Pictet Wealth Management, said the ECB may postpone making any major policy changes until its final meeting of the year.

“The outlook remains highly uncertain and global risks abound, but the signal-to-noise ratio remains low,” he said, CNBC reported. “Early signs of divergence have emerged among executive board members, suggesting more time will be needed to discuss the ECB’s next move.”

The ECB expects eurozone gross domestic product to contract by 8% in 2020 – versus its 8.7% shrinkage forecast in June. ECB also projects 2021 GDP growth of 5% – down from a 5.2% prediction in June."

Analysts noted however that the euro has risen more than 5% against the U.S. dollar since early July, thereby putting more pressure on European exporters.

Regarding the surging euro, at a press conference following Thursday’s meeting, ECB President Christine Lagarde said the currency spike will be monitored, but that there was no need now to adjust monetary policy in response. She reiterated that the ECB does not target an exchange rate.

“Clearly to the extent that the appreciation of the euro puts negative pressure on prices, we have to monitor carefully such a matter, and this was extensively discussed,” Lagarde said.

Low inflation remains a concern in Europe as well.

ECB forecasts the 2020 inflation rate at 0.3%, then rising to 1% next year (well below the central bank’s target of just under 2%.)

Lagarde warned that the headline inflation rate will likely remain negative over the next few months due to “subdued price pressures” – including the appreciation of the euro and a recent reduction in the value-added tax in Germany.

Holger Zschaepitz, a German market analyst, tweeted before the meeting: “Just to put things into perspective: ECB has failed to stir inflation through money printing. Eurozone [inflation] has even turned negative despite an explosion in the balance sheet.”

Lagarde also expressed her concerns about the recent slowing in Europe’s services sector as well as recent spikes in COVID-19 infections.

“The strength of the recovery remains surrounded by significant uncertainty as it continues to be highly dependent on the future evolution of the pandemic and the success of containment policies,” she said.

Melissa Davies, chief economist at Redburn, said the ECB faces serious obstacles in helping the eurozone rebound.

“There is no hint of policy change in the ECB’s statement today, leaving Lagarde with the unenviable task of juggling questions about euro strength and the Eurozone’s most recent negative inflation print for August during the press conference,” she said. “The reality is that the ECB has a more difficult job than most central banks in stimulating the economy, with no fully-fledged federal sovereign to coordinate with.

"National central bank data are showing that core countries, including Germany, are proving able to monetize government spending while periphery central banks [Spain, Greece, Portugal] cannot," she added. "The ECB always has a real problem in trying to stimulate the periphery and, now, in supporting governments to spend.”