May 27, 2018

Banks in better shape, must keep reducing bad loans — ECB's Constancio

27 April 2018, 12:39 | Lorenzo Hawkins

Weaker eurozone growth due to trade tensions, ECB chief says

European Central Bank leaves interest rate unchanged, despite slowing of EU economic growth

The Frankfurt institution kept its main refinancing rate at zero per cent, the rate on the marginal lending facility at 0.25 per cent, and on deposits at -0.4 percent, meaning banks pay to park money with the ECB.

ECB President Mario Draghi is scheduled to hold a news conference Thursday.

An 11 percent oil price rise this year, on top of last year's 18 percent jump, is increasing inflation levels and some of the bank's top policymakers have said they expect the recent soft patch in euro zone economic data to pass.

Draghi stressed that overall growth is expected to remain solid and broad based, and ample liquidity is necessary to bring the inflation back to 2 percent target.

Meanwhile, the prospect of a full-scale trade war could also quickly hurt growth in the region - a potential risk highlighted by policymakers at Europe's central bank last month.

"Today's ECB meeting set a new milestone in terms of buying time" commented analyst Carsten Brzeski of ING Diba bank.

Draghi gave little hint about when the bank might end its 30 billion euros ($36 billion) in bond purchases, now slated to run at least through September.

Lower interest rates and QE are created to pump cash through the financial system and into lending to firms and households - powering economic growth and inflation.

The ECB left all its policy measures unchanged and did not touch the statement as expected.

Draghi said that some causes could be temporary, such as weather, strikes or calendar effects like the timing of Easter. While the greenback's strength is primarily due to higher U.S. bond yields in the past weeks, further good news via growth hard data would push the USA dollar even higher, at the expense of a weak Euro.

With Thursday's decision, the ECB's rate on bank overnight deposits, which is now its primary interest rate tool, remains at -0.40 percent.

A major concern for the European Central Bank is that nationalist rhetoric from the US could decrease the value of the dollar, despite the Federal Reserve gearing up to raise interest rates several times in 2018.

A stronger euro would cap inflation, but would affect growth and exports.

While U.S. 10-year yields hit 3 percent this month for the first time since 2014, German yields - now around 0.61 percent - have barely edged up this year, suggesting that any European Central Bank normalisation will be extremely slow.

The strength of the Euro was not a pressing matter for policy-setters either, and Draghi dismissed the impact of protectionism as so far not material enough to cause concern. The currency is up 1.5 percent against the dollar this year and just 0.3 percent higher on a trade-weighted basis.

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