Thursday, June 6, 2019
The European Central Bank on Thursday delivered a surprise, extending its plans to keep rates on hold for at least six months.
In a statement, at the conclusion of a two-day policy meeting in Vilnius, Lithuania, the ECB said it expects rates to remain at present levels at least through the first half of 2020. Previously, the ECB had said it expected rates to remain on hold at least through the end of 2019.
The euro EURUSD, +0.4100% rose following the announcement, gaining 0.4% versus the dollar to change hands at $1.1263. Economists said while the extended forward guidance appeared dovish at first glance, market participants see the statement’s plan to leave rates at “present levels” as dashing expectations for a further rate cut.
The ECB’s main lending rate stands at 0%, while the deposit rate on funds parked by banks overnight at the ECB is at minus 0.4%.
ECB President Mario Draghi’s news conference kicked off at 8:30 a.m. Eastern.
The ECB, at the conclusion of a two-day policy meeting in Vilnius, Lithuania, also set terms for its previously announced round of targeted long-term refinancing operations, or TLTROs. The ECB is prepared to pay banks that exceed lending benchmarks as much as 0.3% to borrow the long-term funds.
The TLTROs are generous, long-term loans designed to ensure credit continues flowing to the eurozone real economy, particularly companies. This is the third iteration of the program rolled out by the ECB. In Thursday’s statement, the ECB said it would set the rate on the TLTROs 10 basis points above the average rate on main refinancing operations that prevails over the life of the loan. For banks whose eligible net lending exceeds a benchmark set by the ECB, the rate will be lower and could run as low as 10 basis points above the deposit rate.
With the deposit rate at minus 0.4%, qualified banks could be paid as much as 0.3% to borrow. That also indicates that if the ECB cuts rates between now and the end of 2021, the move will be reflected in TLTRO pricing as well, said Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, in a note.
The Stoxx 600 Europe Banks Index SX7P, -0.47% was up around 1% after the announcement, extending its initial gain. The pan-European Stoxx 600 Europe Index SXXP, -0.02% rose 0.4%.
“We suspect that markets were looking for something slightly more aggressive here, but this is very attractive pricing after all,” said Vistesen.
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