The euro has hit a three-week low after the European Central Bank (ECB) chief said he saw no need to deviate from accommodative policies, including zero interest rates and massive bond-buying until the end of the year.The single European currency euro edged down to $1.0659 on Thursday, following comments by ECB’s top brass that signaled no early end to the central bank’s current monetary stimulus.
Speaking at a conference in Frankfurt, ECB Mario Draghi dispelled rumors that the eurozone’s monetary policymakers would start to raise their deposit rate, which is presently set at minus 0.4 percent, in the autumn, saying that the negative side-effects of the policy “have so far been limited.”
“We are not yet at a stage where inflation dynamics can be self-sustaining without monetary policy support,” Draghi said, referring to a core inflation rate in the eurozone of below one percent and still falling well short of the ECB’s target of “close to two percent.”
In the wake of the 2010 sovereign debt crisis in Europe, the ECB has set interest rates at historic lows and has entered secondary bond markets to buy tens of billions of euros in bonds off institutional investors each month, hoping to foster growth by keeping interest rates low, ease eurozone countries’ debt burdens, and boost inflation.
Damper to banks and savers
The announcement is a blow to commercial banks in the currency area which have said the ultra-low interest rate policy is eating into their profit margins. Savers will also be disappointed because they will continue to see their cash piles sapped, with inflation – low as it is – in many cases slightly higher than the interest paid on savings.
Some observers have speculated that the ECB might change tack and raise interest rates in response to increasing growth and overall inflation, which includes volatile food and energy prices, Overall inflation outpaced the ECB’s two-percent target in February before falling back in March.
“The impact [of negative rates] on bank profitability has been offset by the positive side-effects of easier financial conditions,” Draghi said in Frankfurt, adding that the ECB’s commitment to low interest rates “reflects exactly this assessment of side-effects.”
Speaking in a similar vein, the ECB’s chief economist Peter Praet said raising the deposit rate too early would render the central bank’s other monetary policy moves less effective: Without promises that interest rates would remain low for the duration of bond-buying, “the impact of asset purchases may be partly neutralized.”
Supporting eurozone growth
Under current plans, the ECB wants to increase interest rates only “well after” the end of its asset-buying program, scheduled to run at least until December this year.
Draghi also said he was confident a budding recovery in the 19-nation single currency area would continue, pointing to “a virtuous cycle between rising consumption, employment growth, and labor income.” But despite these “signs of progress,” it was “too early to declare success,” he added.
Some of the 25 members of the ECB’s rate-setting governing council, including the heads of the German, French and Austrian central banks, have pushed for Draghi to reconsider the sequencing of the bank’s exit from its aggressive monetary easing.
Jens Weidmann, president of the German Bundesbank, said on Thursday it was “legitimate” for the ECB to begin to head for the exit and “consider monetary policy normalization”, including “how it could adapt its communication in advance.”
uhe/nz (Reuters, AFP)