On Thursday 8 June, the European Central Bank (ECB) kept its main lending rates unchanged, but added that they would not go any lower. It has revised its growth forecasts upwards, but its inflation forecasts downwards.
“We expect (these rates) to remain at their present levels for an extended period of time, and well past the horizon of our net asset purchases”, said ECB President, Mario Draghi. He justified the change in language used by the disappearance of a deflation risk in the Eurozone. He said that although there had been no vote on the content of the ECB’s declaration, there were no “dissenting voices” at the meeting of the Governing Council, held in Tallinn.
At this point, the rate for the principal refinancing operations therefore remains at 0.00%, the marginal loan facility at 0.25% and the deposit facility -0.40%. That notwithstanding, should the economic situation in the Eurozone worsen, the monetary institute stands ready to take further action in this area.
Since its April meeting, the Governing Council has observed slightly more resolute recovery than anticipated, with the risks on growth now “broadly balanced”. It now predicts an increase of Eurozone GDP of 1.7% in 2017, 1.8% in 2018 and 1.7% in 2019.
However, the European institution believes that the observed boost in the Eurozone economy is not sufficiently reflected in the inflation dynamic, which fell back down to 1.4% in May following a level of 1.9% in April. Explaining that there had been very few developments on the inflation front since April, Draghi said that the underlying inflation trajectory (not including energy prices and foodstuffs) was still “flat”, partly due to insufficient pressure from wages.
On Thursday, the ECB reduced its inflation forecasts to reflect falling oil prices. Price increases are therefore expected to stand at 1.5% in 2017, 4.3% in 2018 and 1.6% in 2019.
To sum up, we must be “patient”, but we also need to have “more confidence” in the benefits of monetary policy, Draghi said. He stressed that there had been no discussions at the meeting on tapering the operation for the mass buyback of securities, mainly public ones (‘quantitative easing’), which will continue at a monthly pace of €6 million up to the end of 2017 at least and until the inflation trajectory returns to a level close to but below 2%.
A number of observers, however, take the view that the ECB’s changing language could be interpreted as a signal to the markets regarding a possible decision, this autumn, leading to a normalisation of monetary policy in the Eurozone.
Banco Popular. When asked about the resolution of the Spanish bank Banco Popular (see EUROPE 11803), Draghi welcomed the ECB’s timely action as single supervisor in the framework of banking union in the Eurozone. Taking refuge behind the separation between monetary policy and banking supervision at the ECB, however, he declined to answer questions about the choice of Santander to acquire the failing bank.
The vice-president of the Frankfurt-based monetary institute, Vítor Costâncio, said that the European banking supervisor considered that due to its liquidity problems, Banco Popular was failing - or about to fail - to an extent that made banking resolution necessary. (Original version in French by Mathieu Bion)