The European Central Bank (ECB) kept its key interest steady but again pushed back any rate hike by another six months to the second half of 2020, at the earliest, as inflation remains far below its target and economic growth sluggish.
The governing council of the ECB, the central bank for the 19 members of the European Union (EU) that use the euro currency, also decided that interest rates on its new series of loans aimed at boosting economic activity – targeted longer-term refinancing operations (TLTRO III) – would be set a 10 basis points above the average rate applied in its main refinancing operations.
“The Governing Council now expects the key ECB interest rates to remain at their present levels at least through the first half of 2020, and in any case for as long as necessary to ensure the continued sustained convergence of inflation to levels that are below, but close to 2% over the medium term,” the ECB said in a statement.
The ECB also confirmed it would continue reinvesting payments from maturing securities that were bought under its asset purchase program, known as quantitative easing, “for an extended period of time past the date when it starts raising the key ECB interest rates, and in any case for as long as necessary to maintain favorable liquidity conditions and an ample degree of monetary accommodation.”
It is the second time in three months the ECB has delayed any rate hike, illustrating the speed with which the euro area economy is being dragged down by the slowing global economy.
After slashing its benchmark refinancing rate to 0.0 percent in March 2016 following the launch of asset purchases in 2015, the euro area economy slowly improved through 2017 before decelerating during 2018.
But the ECB remained confident the slowdown was temporary and decided in June 2018 interest rates could begin to rise in the second half of 2019. It also wrapped up its asset purchases, which have reached some 2.6 trillion, in December last year.
By March this year it became clear the slowdown was dragging on, and the ECB pushed back the time frame for any rate hike to 2020, at the earliest, and loosened its policy stance once again by launching a new series of long-term lending programs.
In the first quarter of 2019 growth of gross domestic product in the euro area was unchanged from the fourth quarter of 2018 at 1.2 percent year-on-year, down from 2.5 percent in the first quarter of 2018.
Inflation remains well below the ECB’s target, plunging to a lower-than-expected 1.2 percent in May.
After fluctuating around 2 percent from 2000 to late 2007, inflation in the euro area accelerated towards 4 percent in early 2000 and triggered a rate hike in July 2008.
However, only 3 months later the ECB, along with other central banks such as the Federal Reserve, the Bank of England, the Bank of Canada, the Riksbank and the Swiss National Bank slashed rates in an unprecedented coordinated effort to inject life back into frozen credit markets and prevent a global depression.
In response, inflation slowly climbed back toward the ECB’s target of below, but close to 2 percent.
But an economic slowdown and a fall in oil prices in the fourth quarter of last year quickly put an end to any price pressures and inflation tumbled to 1.4 percent in January, rose slightly to 1.5 percent in February, then eased to 1.4 percent in March before rising to 1.7 percent in April.
The European Central Bank released the following press release:
