- The European Central Bank pushed back its timeline for raising interest rates and announced a new round of low-cost funding to banks, known as TLTROs, effectively admitting that the slowdown across the euro zone’s economy will last longer than it first thought.
It left its main refinancing rate, which determines the cost of credit in the economy, unchanged at 0%, where it has been since March 2016, as expected. However, the other announcements were a surprise to most in the market.
"The Governing Council expects the key ECB interest rates to remain at their present levels “at least through the end of 2019,” the ECB said in a slight change of phrasing. Until January, it had said rates would be on hold “at least through the summer.”
Its previous guidance had left the door open for a hike any time from September onward – a timeline that now seems ambitious, given that Germany and Italy, which account for over 40% of the currency area’s economy - didn’t grow at all in the fourth quarter and have also started 2019 weakly.
The euro fell around half a cent on the news and was down 0.2% on the day at 1.1270 by 8:15 AM ET (13:15 GMT), compared to 1.1311 ahead of the release. Against the pound, the single currency decreased to 0.8596 from 0.8612.
European bond yields also moved lower as rate hike expectations receded. The yield on the benchmark Italian 10-year bond fell to 2.58% from the prior 2.62%, although the 10-year German Bund only edged down to 0.11% from 0.12%.
The ECB also announced the launch of a new series of quarterly targeted longer-term refinancing operations, starting in September 2019 and ending in March 2021, each with a maturity of two years. They will be indexed to the refinancing rate, meaning that their cost will go up if the ECB does hike rates next year.
“These new operations will help to preserve favorable bank lending conditions and the smooth transmission of monetary policy,” the central bank said in its policy statement.
The Organization for Economic Cooperation and Development Wednesday cut its forecast for Eurozone growth this year to a mere 1%. The ECB will present its own new forecasts at President Mario Draghi’s press conference at 08:30 AM ET (13:30 GMT) where he will likely explain the decision to offer new long-term loans to banks which are expected to help to anchor interest rates and ensure enough excess euro liquidity to stop the euro from rising in the foreign exchange markets.]]>