ECB to hold course as Brexit squalls linger

The Myanmar Times - - International Business -

THE Euro­pean Cen­tral Bank, com­forted by bet­ter-than-ex­pected data since Britain’s vote to quit the EU, will keep dras­tic mone­tary pol­icy changes in re­serve at a meet­ing this week, an­a­lysts pre­dicted.

Pres­i­dent Mario Draghi and the de­ci­sion-mak­ing gov­ern­ing coun­cil con­vene in Frankfurt on Septem­ber 8 for their pol­icy meet­ing, the sec­ond after the June 23 Brexit vote.

The min­utes of the July gath­er­ing hinted at a Septem­ber re­sponse, not­ing “down­side risks had clearly in­creased”, and stressed the bank’s “ca­pac­ity and readi­ness to act”.

But with Britain still un­cer­tain about what deal to seek from its EU part­ners, there is lit­tle sign the eu­ro­zone is suf­fer­ing from the shock ref­er­en­dum re­sult.

In­fla­tion and em­ploy­ment have re­mained steady, as has the eu­ro­zone-wide pur­chas­ing man­agers’ in­dex, while loans to busi­nesses grew by 1.3 per­cent in July, ac­cord­ing to ECB fig­ures.

One cloud on the hori­zon was a one-point drop in busi­ness con­fi­dence across the 19-na­tion bloc in Au­gust, to 103.5 – al­though it re­mained above the 100-point growth/con­trac­tion thresh­old.

“The data we have would not jus­tify any dras­tic changes,” said Carsten Brzeski, econ­o­mist at ING Diba bank.

“We don’t have hard data for the third quar­ter yet. That makes it very dif­fi­cult for the ECB staff to dras­ti­cally change its growth fore­cast.”

“So far at least, the fall­out from Brexit is prob­a­bly smaller than many peo­ple had feared,” agreed Ben May of Cap­i­tal Eco­nomics.

While in­fla­tion stag­nated in Au­gust, and at 0.2pc is far short of the ECB’s tar­get of slightly be­low 2pc, Mr May ar­gued that “by early 2017 it is plau­si­ble that in­fla­tion could be quite close to tar­get”, thanks largely to en­ergy prices sta­bil­is­ing.

Pol­i­cy­mak­ers stress that many mea­sures an­nounced by the ECB in March – when it low­ered in­ter­est rates, ex­panded its quan­ti­ta­tive eas­ing pro­gram from 60 to 80 bil­lion eu­ros (US$90 bil­lion) per month and ex­tended it to buy cor­po­rate as well as govern­ment bonds, and of­fered banks new cheap loans – have yet to take full ef­fect.

“Our pri­or­ity is to im­ple­ment this com­pre­hen­sive pack­age in the best possible way,” Banque de France gov­er­nor and ECB coun­cil mem­ber Fran­cois Villeroy de Gal­hau told a Frankfurt bank­ing con­fer­ence last week.

But Mr Villeroy de Gal­hau was ad­dress­ing an au­di­ence in­creas­ingly re­proach­ful of the ECB’s ul­tralow in­ter­est rates.

“Not only banks are suf­fer­ing, the con­se­quences are fatal for savers and their pen­sions too,” John Cryan, chief ex­ec­u­tive of Deutsche Bank – Germany’s largest lender – told the gath­er­ing.

De­spite ready avail­abil­ity of cheap money, “there is lit­tle de­mand for loans from busi­nesses be­cause the out­look is too un­cer­tain”, Mr Cryan said.

For Ger­man len­ders – who still make a large share of their in­come from the mar­gin be­tween in­ter­est paid on de­posits and the rates they charge on loans – the ECB’s pol­icy has been costly.

The cen­tral bank’s de­posit rate has been neg­a­tive since 2014, mean­ing banks have to pay to park their ex­cess cash at the ECB overnight. In March, it hit -0.4pc.

The head­line re­fi­nanc­ing rate at which banks bor­row money from the ECB has been at zero since March and its mar­ginal lend­ing rate at 0.25pc. –

Photo: EPA

Mario Draghi will keep mone­tary pol­icy changes in re­serve.

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