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September 9, 2016

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ECB keeps record low rates but warns of Brexit ‘uncertainties’

Source: AFP | September 9, 2016, Friday | Print Edition

THE European Central Bank kept its interest rates at record lows yesterday and held fire on more economic stimulus, but warned of “uncertainties” ahead for the eurozone over the Brexit vote.

Describing the ECB’s current ultra-loose monetary policy as “effective,” bank chief Mario Draghi said policymakers stood ready to take future action if needed to push up stubbornly low inflation and reinvigorate growth.

In the meantime, Draghi asked for patience while the full impact of current policies unfolded.

Draghi also announced new economic forecasts after a meeting of the bank’s governing council in Frankfurt, slightly raising this year’s growth forecast to 1.7 percent while lowering expectations for 2017 and 2018 to 1.6 percent.

“The economic recovery in the euro area is expected to be dampened by still subdued foreign demand, partly related to the uncertainties following the UK referendum outcome... and a sluggish pace of implementation of structural reforms,” Draghi said at a press conference.

The eurozone economy has held up well against the initial shock of Britain’s June vote to quit the European Union, early data showed.

But since Britain has yet to trigger the process to extricate itself from the bloc, analysts warn that it could take time for the economic fallout to make itself felt.

The bank’s governing council voted to keep the benchmark refinancing rate at zero percent, while the rate on the marginal lending facility remains at 0.25 percent and the bank deposit rate at -0.4 percent.

A negative deposit rate means banks have to pay to park excess cash at the ECB overnight, an unusual state of play that has squeezed banks’ profits and sparked fears lenders could pass the charges on to customers.

The council sees the rates to remain at current, or lower, levels “for an extended period of time,” the ECB said.

The rates decision was widely expected by analysts who predicted the ECB would opt to wait for more conclusive data on Brexit before embarking on any drastic policy changes.

The ECB also refrained from making any tweaks to its massive asset-buying program to encourage lending and investment, which has seen it purchase over a trillion euros in government and corporate bonds over the past 18 months.

“The governing council confirms that the monthly asset purchases of 80 billion euros are intended to run until the end of March 2017, or beyond, if necessary, and in any case until it sees a sustained adjustment in the path of inflation consistent with its inflation aim,” the bank said.

Eurozone inflation — which the ECB aims to maintain at just below 2 percent — remains well shy of target, stuck at 0.2 percent in August.

Members of the council yesterday kept their inflation hopes flat, at 0.2 percent for 2016, 1.2 percent for 2017 and 1.6 percent for 2018.

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