Economy

ECB Takes Opposite Direction to Fed, Rates to Remain Unchanged

ECB Takes Opposite Direction to Fed, Rates to Remain Unchanged”

India's central bank on Thursday delivered a third consecutive interest rate cut, following Australia's central bank which cut rates earlier in the week.

"The market believes Draghi's take on inflation is wishful thinking", said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG, which predicts the European Central Bank will cut the deposit rate toward the end of this year and extend its low-rate pledge to mid-2021.

For now, "the rising threat of protectionism, the geopolitical factors that are weighing on the eurozone economic outlook, would rule out any increase in interest rates", he added. But that's slim comfort for banks, whose net interest margins - the difference between the rate at which they borrow and the rate at which they lend - have been squeezed.

"The ECB has bought itself enough space to react to negative risks in the future", commented economist Marcel Fratzscher of the Berlin-based DIW think-tank.

The ECB "is taking a more proactive approach, rather than the wait-and-see approach you're seeing from the Fed", said Minh Trang, senior foreign exchange trader at Silicon Valley Bank.

Therefore, the central bank would do what is necessary to sustain economic growth.

"Core" inflation, which excludes volatile items like food and energy, is still weaker.

The key market inflation measure, tracked by the European Central Bank, has fallen 32 basis points since the start of 2019, but a year ago it stood at 1.75%. The bank also signaled that it would continue to reinvest maturing bonds in it's 2.6 trillion euro portfolio.

Both were created to increase lending, economic growth and ultimately inflation.

Observers have pointed to trade disputes between Washington and key partners like China, Mexico and Europe as one reason for sluggish gross domestic product growth and inflation.

"The uncertainty about the Brexit negotiations and. about the vulnerabilities of certain emerging market countries which are important, and more generally the uncertainty about global trade growth, have extended beyond what we believed in March and that is why we have extended our forward guidance", he said.

The governing council discussion focused on three interrelated topics: the confidence in the baseline economic scenario of continuous growth, but with prolonged uncertainties, and the readiness to act in case of adverse contingencies.

We did get some more details on the bank's TLTRO programme, although they were slightly less generous than we had anticipated.

But this year, the ECB's forecasts prices to rise 1.3%, 1.4% next year and 1.6% in 2021. Although inflation remains well below the 2% target (1.2% in May), he said there was "no probability" of deflation at this stage.

MXN: The Mexican Peso is on the backfoot across the EM complex after hopes of a trade agreement between the United States and Mexico faded, while a sovereign rating downgraded by Fitch added to further losses in the currency.

But price stability in the single currency area will not be his responsibility for much longer.



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