ECB holds fire on policy, more stimulus expected in September

The European Central Bank kept its policy unchanged on Thursday, as expected by economists, but the monetary authority indicated that it may boost stimulus later this year.

The ECB's Governing Council decided to leave interest rates at 0.00%, the marginal lending facility rate at 0.25% and the deposit facility rate at -0.40%. The asset purchase programme (APP) was maintained at €80bn per month until the end of March 2017.

The ECB followed the lead of the Bank of England which last week decided against changes to policy as it awaits more data to assess the impact of the UK's vote to leave the European Union on 24 June.

"Perhaps, it was the best move because the bank certainly wants to assess the consequences of Brexit which has triggered the need for more quantitative and dragged the bond yields in negative territory," said Naeem Aslam, analyst at Think Markets.

"Although some investors do question that if these central banks; the BoE and the ECB will bring any more stimulus. Market is addicted to this medicine and most of the boom which we have experienced in the equity market is based on the basis of this cheap funding. If these liquidity tanks start to run dry, we may start to see heavy sell off which many have been waiting for."

In a press conference following the policy announcement, ECB President Mario Draghi reiterated that the bank was ready and willing to act if warranted to achieve its objective.

“In the past, we’ve given enough evidence not only of our readiness, willingness to act but also to be able to adapt our programs so as to reach the objective of a purchase of €80bn a month,” he said.

“I think in worrying about the coming months, whether we’ll actually be able to fulfill this objective, proper attention should be given to evidence we’ve given in past few months and the ability to exploit flexibility.”

Draghi said by the next policy meeting on 8 September the ECB will be in a better position to re-assess the risks to the euro-area outlook as it will have gathered more information on the fallout of Brexit and have a new set of macroeconomic projections. He said downside risks to economic recovery included the EU referendum outcome, geopolitical uncertainties, emerging market weakness, balance sheet adjustments and slow progress of structural reforms.

Economists expect the central bank will wait until the September policy meeting to add stimulus.

"We think the most likely option for the ECB is to extend quantitative easing beyond March 2017, possibly by six to nine months," said Barclays.

"We do not rule out further deposit rate cuts either, although we think these are less likely."