ECB keeps rates unchanged, monitors Brexit impact

By | July 25, 2016

The European Central Bank (ECB) decided not to proceed with any changes of the bloc’s monetary policy and also left interest rates unchanged. At the time of publishing the ECB decision, the euro increased while Eurozone stock markets remained unchanged.

The decision taken on Thursday implies that the main refinancing rate remains at 0%, the marginal lending facility rate at 0.25%, and the deposit facility at -0.40% which means that it actually costs money to the banks to have deposits with the central bank. The news were not surprising to numerous investors as that the bank said a few times in the past that it would certainly keep rates at the same or lower levels for an extended period of time.

In the pre-scheduled conference that followed, ECB President Mario Draghi commented on Brexit and the geopolitical instability resulting from the decision. He also highlighted the terrible state of the Eurozone’s banking industry and economic difficulties such as the high numbers of unserviced loans.

Mr. Draghi also pointed that Europe’s financial markets have ‘weathered’ the volatility caused by the UK’s vote to exit the EU about one month ago. He confessed that UK’s decision will work versus Eurozone’s efforts towards recovery together with the slow effects of structural reforms within the block, and also the worsening economic forecasts of emerging markets.

The markets were interested to find out whether ECB’s current Quantitative Easing (QE) programme will be stretched beyond its current deadline at the end of the first quarter of 2017. Instead, the ECB President has actually not given any confirmations after only commenting that there is intention of continuing with the €80 billion worth of monthly asset purchases at least until the deadline. However, he said that the programme’s duration might be extended beyond the deadline and until inflation moves closer to the target.

The EUR/USD on Thursday, and following the ECB data, reacted with gains as it soared at some point to 1.10586. But by the end of the trading session it gave up some of the gains and ended with a mild 0.1% increase at 1.10311. On a weekly basis, the world’s most popular currency pair decreased by 0.7% as it appears that the effects of the UK Brexit decision still weigh on the euro’s performance.

Nevertheless, there is a number of investors who expect the ECB to adjust the conditions governing its QE programme. The assets qualified for purchasing under the programme need to have yield to maturity larger than the deposit facility rate, currently at -0.40%, but now the rates of some German Bunds’ yields have dropped since the Brexit vote under that level. Those Bunds became ineligible for purchase under the programme and hence the expectations for the alteration of the capital criteria so that the ECB does not run out of eligible bonds to purchase.

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