The ECB left the monetary policy on hold, leaving the main refi rate at 0.15% and the deposit rate at minus 0.10%. At the press conference, President Darghi acknowledged the moderation of “growth momentum” and warned that tensions between Ukraine and Russia would pose downside risks to the recovery. Bond yields plummeted as interest rates are expected remain at exceptionally low levels for an extended period of time. Further easing cannot be ruled out as the central bank struggles to revive the economy.
The central bank attributed soft inflation to “lower energy price” but affirmed that other main components remained “broadly unchanged”. It maintained the view that inflation expectations over the medium- to long- term would continue to be firmly anchored in line with the aim of maintaining inflation rates below, but close to, 2%. The ECB forecast that annual HICP inflation would stay low over the coming months but would then increase gradually during 2015 and 2016. Money and loan growth was “subdued” over the intermeeting period. Credit standards remained relatively tight but some loan segments had shown increase demand. The ECB reiterated the pledge to assess the balance sheet comprehensively and would improve the capital position so as to support credit expansion. Draghi affirmed that the TLTRO would help facilitate more lending.
Noting that the recovery remained “weak, fragile and uneven”, President Draghi pointed out that economic data over the past 2 to 3 months that has shown that “there has been a slowing down in the growth momentum”. He warned that the situation would be worsened by geopolitics, indicating that “heightened geopolitical risks, as well as developments in emerging-market economies and global financial markets, may have the potential to affect economic conditions negatively”. Specifically, the situation in Ukraine and Russia would have “a greater impact on the euro area than they certainly have on other parts of the world” although it’s “hard to assess the impact at the beginning of these crises”.
The targeted LTOR (TLTRO) scheme announced in June aims to enhance the functioning of the monetary policy transmission mechanism by supporting bank lending to the real economy. Banks participated in scheme would initially be able to borrow an amount equivalent to up to 7% of a specific part of their loans in 2 operations in September and December 2014. After this, additional amounts can be borrowed in further TLTROs, depending on the evolution of the banks’ eligible lending activities in excess of bank-specific benchmarks. Draghi expected the demand for loans from this scheme would be between 450-850B euro.