The European Central Bank has decided to leave its interest rate unchanged at zero per cent. There had been some speculation that the bank could have announced a rise as a precursor to normalising rates in the wake of the Global Financial Crisis and the European Sovereign debt crisis, but this has been postponed. The ECB is expecting to hold rates at 0% until the summer of 2019.
The ECB interest rate has been fixed at 0% since March 2016. It has a long-term average of 2.01% (1998 -2018) with a record low of 0% and a high of 4.75% (October 2000).
Of greater significance is the announcement from ECB that it is to end its quantitative easing programme in December. In September, the monthly asset purchasing programme will be reduced from its current level of €30 billion to €15 billion. The bank stated that interest earned from maturing bonds would be reinvested “for an extended period of time” once the programme ends. This would continue for as long as necessary to maintain adequate monetary accommodation and favourable liquidity. This means that the ECB has no immediate plans to unwind the assets that it has amassed under the asset purchase programme (APP) to date.
The APP scheme has been running since October 2014 and was designed to ensure liquidity in the Eurozone and counter deflation. The total holdings (2017 data) are currently in the order of €414 billion. At some stage, the central banks will need to divest themselves of assets purchased under the various QE schemes, but this will need to be a gradual process so as not to generate a Bear market for the assets. In principal, electronic money generated in the QE process will be eliminated at the end of it to restore the money supply to pre-crisis levels.
The ECB decision on rates produced a big drop against the Dollar in the value of the Euro. Before the announcement, it was trading at $1.1829, but it has dropped back to trade at $1.1596 currently, as investors factor in the news that rates are unlikely to rise for more than a year.