ECB holds rates but signals more stimulus is on the cards

The European Central Bank left interest rates unchanged on Thursday but signalled that a rate cut and more monetary easing were on the cards, pushing the euro to a two-month low against the dollar.

The ECB left its main refinancing and deposit rates unchanged at 0.00% and -0.4%, respectively, as expected. Meanwhile, the marginal lending facility was also held steady, at 0.25%.

In its policy statement, the central bank said rates would be left at "present or lower levels" at least through the first half of 2020. The ECB had previously said it would leave rates "at present levels" during that time period.

"The Governing Council intends to continue reinvesting, in full, the principal payments from maturing securities purchased under the asset purchase programme 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 favourable liquidity conditions and an ample degree of monetary accommodation," it said.

"The Governing Council also underlined the need for a highly accommodative stance of monetary policy for a prolonged period of time, as inflation rates, both realised and projected, have been persistently below levels that are in line with its aim. Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim. It therefore stands ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner."

The ECB said it had tasked the relevant Eurosystem Committees with examining options, including ways to reinforce its forward guidance on policy rates, mitigating measures, such as the design of a tiered system for reserve remuneration, and options for the size and composition of potential new net asset purchases.

The euro fell to a two-month low versus the dollar after the announcement, with the German 30-year bond yield hitting a record low of 0.16%.

Neil Wilson, chief market analyst at Markets.com, said: "They should call him Il Postino, because Mario Draghi always delivers. Markets have lusted for more easing and he’s come good. Having said in 2012 he would do ‘whatever it takes’, Draghi has delivered one final gift to the ECB with a new policy direction that his successor will carry forward.

"It’s not quite as dovish as we thought it might be in that there was no policy change today, but it sends a very clear signal."

Capital Economics said that before the announcement, markets had priced in about a 40% chance that the Bank would cut interest rates, so some investors will have been disappointed by the decision to leave interest rates unchanged.

However, this disappointment will have been tempered by the new dovish language in the press release.

Economist Jack Allen-Reynolds said: "Overall, the press release was broadly in line with our expectation that the Bank would strengthen its guidance on interest rates and suggest that more asset purchases are likely. Policymakers have clearly not yet made up their mind on exactly what to do. We still think that they will cut the deposit rate to -0.5% in September. But by October, we suspect that they will have reached a consensus to re-launch QE, probably with a greater weight on corporate bonds."

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said: "As we have persistently noted, the ECB never pre-commits. But this is as close as it gets. When the central bank convenes in September, it will be looking at poor Q2 GDP data, and core inflation that almost surely will be virtually unchanged from its current trend of about 1-to-1.2%.

"In short; further easing is on the way. But what kind? We are fairly certain that deposit rate cuts are coming, but today’s initial statement points towards a combination of rate cuts and QE. We are sure that Mr. Draghi will be quizzed intensely about this balance, and options, in the press conference."