ECB Guidance Is Not Tilted Toward Rate Hike

The ECB Held Its Rates Unchanged In June

The ECB decided to hold its key interest rates unchanged in June. The banks overnight lending rate is -0.4% as it has been for many years. The bank also signaled that it would continue to reinvest maturing bonds in it’s 2.6 trillion euro portfolio.

Further, the ECB has decided to push off its first interest rate hike since the Global Financial Crisis until next year. The bank had until trade war tariffs derailed the growth outlook, been expecting to hike rates as early as August but are now targeting the middle of 2020. Despite the assumption rates will be increased next year, Mario Draghi said during the press conference the outlook was not tilted toward hikes.

Geopolitics Drags On Outlook

Draghi said the prolonged presence of uncertainties related to geopolitics and protectionism had left their mark on sentiment. Activity in the EU is expected to remain sluggish in the near-term which is why the ECB expanded its loan operations. The bank is now offering a -0.3% interest rate to banks who will lend money.

The ray of light seized by the market is Draghi’s statement about the council’s willingness to act. He says the council is ready to act in case of adverse contingencies which is seen as a veiled promise to lower rates/stimulate the economy should conditions worsen. This outlook is compounded with the upcoming end of Draghi’s tenure. Many in the market believe he will stimulate the economy one more time before he leaves the office.

Risks Remain Tilted To The Downside

Although risks remain tilted to the downside there is still hope. Draghi says the outlook for growth and inflation are brighter than they were despite the risk. The statements were not well received by doves looking for the bank to make a move in the near future. According to analysts, the Italian banks are best positioned to benefit from the new TLTRO offering which is a bit of a mixed blessing. While supporting the banks is the intention, the Italian government and financial sector have been at odds with the EU for some time.

The U.S. yield curve flattened in response to Mario Draghi’s dovish tone. The curve, a sign of economic health, had been strengthening (steepening) in the previous session. A flattening or inverted yield curve is a sign of a possible economic recession.