ECB Keeps Interest Rate at Zero

Alan Penny

23 January 2020

3 min read

  • Interest rate kept at zero as expected
  • Asset purchases continue at €20 billion a month
  • This will continue until ECB raises interest rates

The European Central Bank had an interest rate announcement on Thursday, which was widely expected to be left unchanged. This was, in fact, the case, as the European economy does not warrant any type of monetary tightening.

The European Union has fallen behind the Asian and North American regions, so these announcements are simply a matter of formality.

Key facts and quotes

The Governing Counsel “expects the key ECB interest rates to remain at the present or lower levels until it has seen the inflation outlook robustly converge to a level sufficiently close to, but below, 2% within its projection horizon, and as such convergence has been consistently reflected in underlying inflation dynamics.” It is, of course, is a stretch to say it’s going to happen anytime soon, so the interest rate situation in the EU should not cause concern for some time.

traders will be paying attention to that asset purchase program closely for the next several months, if not years

The Governing Council will continue its program to make purchases under its asset purchase program at €20 billion a month. The Council expects them to run for as long as necessary to reinforce the impact of its accommodative policy rates, before it starts raising the headline ECB interest rates.

This sets up a clear signal as to when the European Union is going to change monetary policy. Traders will be paying attention to that asset purchase program closely for the next several months, if not years.

It was also suggested that the Governing Council intends to continue reinvesting the principal payments from maturing securities that had been purchased for an extended period of time. In fact, it had even implied it was going to continue this well past the time when ECB interest rates have been raised. It further hinted that the program will be in place for as long as it is necessary to maintain liquidity conditions throughout the region.

The Governing Council is also going to launch a review of its monetary policy strategy. There may not be a huge change coming down the road, but there may be some tweaking of the accommodating policy situation.

EU to remain loose with its monetary policy

Going forward, this is a sign that the European Union will remain very loose with its monetary policy, which should not be a huge surprise. This will probably continue to weigh upon the euro, but it may help lift European equities over the longer term.

With a little bit of help via exports, the EU may be able to turn things around completely. However, these are slow and arduous processes, and the current times should continue to favor the United States and parts of Asia, specifically China and perhaps even Southeast Asia.

Ultimately, Europe still continues to be slow, and the economic policy certainly seems to be reflecting that. Longer-term, this could be good for investors when it comes to specific companies, but it may be poor for the euro itself.

Written By
Alan Penny

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