Draghi strikes downbeat note as European Central Bank extends policy rate hold

Daniel Fowler
June 8, 2019

The EURUSD fell to a new session low of 1.1197 on the European Central Bank headlines, but quickly rebounded and traded to new session highs.

Analysts said the ECB's decision reflects concerns over the developing trade war between the United States and China and its potential to undermine the Eurozone's own worldwide trading prospects.

"From my point of view, this should not be one of the ECB's permanent instruments", Nowotny, who heads Austria's central bank, told a news conference in Vienna.

In a well-flagged move, ECB President Mario Draghi is expected to offer to pay banks if they borrow cash from the central bank and pass it on to households and firms.

Although risks remain tilted to the downside there is still hope.

"The uncertainty about the Brexit negotiations and".

Inflation forecasts were also tweaked at Philip Lane's first policy meeting as European Central Bank chief economist.

While economists have downgraded European Central Bank outlook for growth and inflation next year to 1.4 percent and 1.3 percent, respectively.

The governing council agreed to keep rates at record lows and announced details on a program to infuse lenders with cheap loans.

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The markets have got way too ahead of themselves with recent Dollar positioning and the same can be said with the expectations that have emerged that the Federal Reserve will jump into its vehicle and reverse U.S. interest rate policy at full speed. But Draghi, whose term ends on October 31, is conscious that the ECB's policy arsenal is almost depleted after years of stimulus.

They also expect the bank's next move to entail policy easing rather than tightening. The banks overnight lending rate is -0.4% as it has been for many years.

"Turning the QE taps back on by the end of the year is an increasingly probable scenario", said Nancy Curtin, Chief investment officer at Close Brothers Asset Management.

With a global trade war weighing on confidence, industrial production and exports have taken a dip, exacerbated by a string of domestic difficulties, from German industry's struggles to Italy's looming budget fight with the European Commission. Draghi says the outlook for growth and inflation are brighter than they were despite the risk.

Draghi said yesterday he saw no probability of deflation, however, and a low probability of recession. The Italian will finish his eight-year term at the end of October without once having raised interest rates.

Others proposed restarting the asset purchasing programme, finalised last December, while other members defended further monetary policy guidance, beyond the mid-2020 scenario.

Draghi is also expected to stick to his message that the economy's rebound is merely delayed and not derailed.

That should normally be good news, with faster growth accelerating inflation towards the central bank's price stability target.

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