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ECB to keep rates on hold, gauge impact of latest cut

Last Updated: Thursday, July 3, 2014 - 10:07

The European Central Bank is unlikely to make new policy moves at its monthly meeting on Thursday, focusing instead on assessing the impact of last month`s unprecedented package of measures.

After cutting rates last month and unveiling new liquidity measures in its battle to prevent the single currency area from slipping into deflation, the ECB will "sit tight" at its meeting on Thursday, central bank watchers predicted.

Eurozone inflation is still stuck at the lowest levels since the financial crisis, data from the European Union`s Eurostat data agency showed on Monday.

Authorities across the eurozone are closely watching the inflation rate in the hope that it will edge up towards the bank`s target of just under 2.0 percent.

Inflation across the 18-nation eurozone was 0.5 percent in June -- the same level as in May.

This means that inflation is at the lowest level since the financial crisis of 2008-2009 nearly froze the market on which banks lend to each other and caused recession in several advanced economies.

Since unduly low inflation raises a risk of deflation which is notoriously difficult for central banks to reverse, the ECB has stepped in.

"More concrete easing steps at this week`s meeting would be very surprising, but the ECB will maintain its dovish language and potentially announce important details of its June decisions," said Berenberg Bank analyst Christian Schulz.At its June meeting, the ECB entered uncharted waters, taking one of its key interest rates into negative territory for the first time.

It lowered its benchmark refinancing rate to 0.15 percent and cut the deposit rate, the rate at which the central bank pays commercial banks for depositing their unused cash, to minus 0.10 percent.

This means that banks will be charged for parking funds at the ECB, to encourage them to lend to businesses and consumers instead.

ECB chief Mario Draghi also unveiled plans to pump more liquidity into the financial system later this year via the Targeted Long-Term Refinancing Operation (TLRTO).

These are different to the liquidity measures it took at the end of 2011 and the beginning of 2012.

At that time, banks did not lend the cash on to the small and medium-sized companies that form the backbone of the eurozone economy and so this time, the ECB is targeting the loans to encourage banks to lend to households and non-financial corporations.

"After announcing a raft of measures last month aimed at easing the monetary stance and, eventually, boosting lending to firms it would be a major surprise if the ECB took further action at this meeting," said Ben May of Oxford Economics.

"Draghi will reiterate recent statements made by himself and other governing council members that unlimited funding for banks until at least the end of 2016 is a signal that the policy rate is unlikely to be raised over this time horizon," he said.

UniCredit analyst Marco Valli also believed the ECB "is now in a wait-and-see mode."

The meeting on Thursday "will probably be mostly about the technical features of the targeted longer-term refinancing operations (TLTROs), while we expect no change to the central bank`s economic assessment," he said.

ING DiBa economist Carsten Brzeski said the meeting "should not be a reason for anyone to postpone vacation plans or to change preparations for the next round of World Cup matches in Brazil."

"Following the June fireworks, we expect the ECB to take it easy. It will probably take until the end of the year before the June measures show any significant impact on lending. We expect the calm after the storm to last for quite some time," he said.

First Published: Thursday, July 3, 2014 - 10:04
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