Closed ECB July rate decision – as it happened

Draghi behind EU symbol

The European Central Bank’s governing council met today to discuss policy following the UK’s vote to leave the EU.

President Mario Draghi refused to be drawn on the prospect for any further stimulus in September. But he stressed that while Brexit was a “headwind” the financial system had proved resilient.

Key points

  • Rates have been kept on hold
  • Mr Draghi says that markets have shown “encouraging resilience” to the Brexit vote
  • The ECB had not discussed changing the terms of its asset purchases to include a wider range of bonds
  • The recovery is continuing – all be it at a slower pace
  • Shares in Italian banks jumped following Mr Draghi’s statement that a public backstop for non-performing loans would be “very useful”

Welcome to the FT’s live coverage of the ECB’s governing council meeting and press conference.

In the lead-up to the meeting, we have published a guide by our Frankfurt Bureau Chief on what to watch from the meeting:

Brexit is set to dominate the European Central Bank’s agenda today — when the ECB’s governing council gathers for the first time since the UK’s vote last month to leave the EU. But the council’s 25 members are not expected to unveil a fresh round of measures just yet.

The central bank is widely expected to keep interest rates unchanged — a decision expected at 12:45 UK time — with the benchmark main refinancing and deposit rates remaining at 0 per cent and minus 0.4 per cent respectively. But Mario Draghi, ECB president, could hint how his central bank will respond should the UK’s decision to break away from Brussels threaten the eurozone’s faltering economic recovery.

Other areas that the ECB could address in the press conference is the impact of a Brexit-induced flight into safe-haven assets. This has led to a fresh wave of concern over a problem that has dogged the ECB since it first unveiled its €80bn-a-month quantitative easing programme in January 2015: it could run out of assets to buy.

Some ECB watchers might also be looking any comments by Mr Draghi on the state of Italian banks. However, Claire points out:

Mr Draghi could be asked for his view, but the subject is delicate for an ECB president who, before coming to Frankfurt in late 2011, headed the Italian central bank.

More of her preview here.

Markets expect the ECB to keep the deposit rate unchanged at -0.4 per cent – attaching a 73 per cent probability to this outcome.

Many economists have also said they expect the Governing Council to defer new announcements until September. Krishna Guha, of Evercore ISI, told clients in a note that

We think the Governing Council will acknowledge this week that there will be some drag in the base and an increase in downside risk associated with Brexit but say that it is too early to judge the implications for monetary policy and punt that decision to September.

And Alex Holmes of Capital Economics noted that

While the ECB may hold fire today, we expect it to loosen policy further in September. This should keep downward pressure on the euro, but provide further support to euro-zone equities and core government bonds.

The euro is in a holding pattern ahead of the meeting, trading basically flat on the day at $1.1023. The FTSE Eurofirst 300 share index is down a little – 0.40 per cent.

As we wait for the ECB press conference here is a snippet of the Governor of the Bank of Japan’s views on so-called helicopter money. In a BBC radio 4 documentary presented by the FT columnist Martin Wolf, Mr Kuroda said there is “no need and no possibility” to embark on a policy to inject direct stimulus into the veins of the economy or the pockets of consumers.

We can expand the quantity as well as further change and expand the quality [of QE] and also we can further deepen the negative territory on the interest rate imposed on part of the current account deposit by commercial banks.We have a very powerful framework and I don’t think there is any significant limitation on further easing of monetary conditions in Japan if necessary.

Read what Nathalie Thomas on FastFT wrote earlier here

Economists are divided on what they think the ECB will do, if they want to loosen monetary policy further.

Michael Schubert and Jorg Kramer, of Commerzbank, told clients in a note that

If the ECB wants to loosen monetary policy further, we regard a cut in the deposit rate including a multi-tiered rate system more likely than an increase in the volume of QE.

Analysts at Barclays instead said

We think the most likely option is an extension of QE beyond March 2017 by six or nine months. This would require the recalibration of some QE parameters.

The ECB appears to be getting some bang for its buck out of its corporate bond buying programme. according to a report by FT’s Gavin Jackson.

“It’s working even more than you would anticipate,” Hans Lorenzen, global head of credit products strategy at Citigroup says in the report.

The central bank began to buy high quality corporate bonds last month to improve financing conditions in the eurozone in an attempt to quicken growth and lift inflation. Since then, the average bond purchased by the central bank has increased in price by 1.9 per cent, according to an FT analysis.

It compares with a rise of 1.6 per cent since the close of trading on June 7 for bonds included in the euro iBoxx corporate index, a proxy for the larger universe of bonds from which the ECB can buy.

More here.

One of the most interesting topics in today’s press conference is likely to be Mr Draghi’s take on whether the ECB has – or will – run out of assets to purchase.

The post-Brexit flight to safety has pushed down yields on a range of assets – notably German bonds.

According to figures from Tradeweb, a financial services company, just under €1tn of eurozone debt is now ineligible for the ECB’s QE programme, since its yield is less than the central bank’s limit of minus 0.4 per cent.

This represents 17.5 per cent of the entire market for eurozone debt.

With the fallout from Brexit the key issue – here is a nugget from the domestic data.

Figures released by HM Revenue and Customs today show that the number of residential properties purchased rose by 5 per cent in June in the run-up to the referendum (based on a seasonally adjusted measure).

However, property transactions for the month are still 10 per cent below the level seen in June 2015. This is largely thought to be because many housebuyers accelerated their purchases to get in before the hike in stamp duty rates for buy-to-let and second home-owners, which happened at the beginning of April.

Looking at transactions between March and June together shows that the total number of transactions was 10 per cent higher than the same months in 2015.

Some of the stamp duty land tax owed for properties bought in March was sent to HMRC in April. This has provided a boost to tax receipts this year.

But, despite this boost, tax revenues overall look weaker than hoped for so far this year, according to figures published by the Office for National Statistics this morning.

“Keep calm and carry on”

Kristin Forbes, an external members of the Bank of England’s Monetary Policy Committee, argues in an article today that the Bank should “wait for the fog to clear” before cutting interest rates.

The country’s potential growth rate will likely fall…But many of these effects will occur slowly—and their magnitudes will depend on what new agreements [on trade] are negotiated.

Unfortunately, we do not yet have any hard data on how all these effects will evolve.

Ms Forbes’ concern is that cutting interest rates could have negative as well as positive effects on the UK economy.

Banks will make less money on lending – potentially making it harder for consumers and businesses to get loans.

Pension and life insurance funds will have a harder time meeting their commitments. Companies may need to put more money into pension schemes – leaving less to spend on workers and investment.

Ms Forbes’ view is that the orderly response so far to the Brexit vote allows the Bank time to wait for more data on how the economy has been affected so that they can decide how best to deploy the BoE’s tools. These tools, she says are “not limitless”.

Hard data on how the UK economy has been affected by Brexit will not be available until August and we will have to wait until the end of October for the first estimate of GDP growth in 2016 Q3.

Consult our post-Brexit economic calendar for important dates to look out for.

The big question though remains what the ECB’s assessment of the implications for the eurozone are from the UK’s decision to leave the EU.

Earlier in the week, Maurice Obstfeld, IMF chief economist, said that it had trimmed its global growth forecasts after the vote.

“As of June 22, we were . . . prepared to upgrade our 2016-17 global growth projections slightly. But Brexit has thrown a spanner in the works”.

But as the chart shows, it is the UK rather than the rest of the world where the impact is expected to be felt.

Does Mr Draghi agree with that assessment?

Professional advisory firm PwC said earlier today that it believes Ireland and Cyprus are the most exposed of the Eurozone countries to the fallout from Brexit from a trade perspective.

It wrote:

PwC’s analysis identifies the 10 EU countries that export the most to the UK, relative to the size of their economies. Ireland (19.9%) and Cyprus (9.5%) sit at the top of this list. Of the larger European economies, Germany exports the most to the UK relative to the size of its economy (3.7%). France (2.5%) and Italy (1.7%) don’t rank within the top 10.

These numbers are relatively modest at the macroeconomic level but could be more material for some industry sectors, so affected businesses in these economies do need to be prepared for different trade arrangements in the future.

Confidence among consumers in the Eurozone fell in July following the UK’s vote to leave the EU.

The European Commission’s measure of consumer confidence in the Eurozone fell from -7.2 in June to -7.9 in July – remaining slightly better than the -8 figure that economists had predicted.

But confidence remains above the long-run average seen over the period since 1985. Over the entire period since the Commission began collecting these data, consumer confidence has averaged -12.3.

A new survey of consumers across Europe shows that people in Spain, Italy and Poland are more concerned about the impact of Brexit on their economies than Brits are about the impact on the UK.

Nearly half of respondents in Spain said they thought the Brexit vote would have a ‘somewhat’ or ‘extremely’ negative impact on their own economy, according to a new survey by Mintel, the market intelligence agency. This compares to 39 per cent among respondents in the UK.

But European respondents were also more pessimistic about the prospects for the UK than Brits were. Nearly two-thirds (64 per cent) of people polled in Germany thought that Brexit would have a negative effect on the UK economy.

So have the traders called it right? The rate decision is now just 5 minutes away. As a reminder, most are expecting rates to stay on hold and are most interested in Draghi’s comments later on

Emoticon Rates are unchanged

Here is the full statement:

At today’s meeting the Governing Council of the ECB decided that the interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will remain unchanged at 0.00%, 0.25% and -0.40% respectively. The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

Regarding non-standard monetary policy measures, the Governing Council confirms that the monthly asset purchases of €80 billion 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 President of the ECB will comment on the considerations underlying these decisions at a press conference starting at 14:30 CET today.

The ECB’s comments are more doveish than in June – hinting that rates could be cut further and will not be raised until well beyond next March

The Governing Council continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.

Markets are flat on the announcement, which came inline with expectations.

Global stocks are hugging eight-month highs and benchmark bond yields are steady

With eurozone inflation having edged up to an annual rate of 0.1 per cent in June, the ECB said today

the monthly asset purchases of €80 billion…[will run] until [the Governing Council] sees a sustained adjustment in the path of inflation consistent with its inflation aim [of 2 per cent].

The focus now shifts to the press conference and any clues from Mario Draghi about possible action in response to Brexit in September.

The bar though for further rate cuts is high.

Markets will be watching closely to see whether Mario Draghi hints at any potential changes to the parameters of the ECB’s bond purchase programme

Claus Vistesen, Chief European Economist at Pantheon Macroeconomics, says he expects “a formal extension [of the ECB's quantitative easing programme] to September 2017 at the next meeting in September.”

He adds that one of the main topics at the press conference will be recent suspicions that the ECB is set to deviate from the capital key, which limits which bonds the ECB can buy.

Under its current rules, the ECB is running out of bonds to buy, especially if it wants to extend the duration of QE later this year. Mr. Draghi will be quizzed on whether the ECB openly intends to abandon the capital key – we doubt it – and if not, what other measures the ECB will take to make the implementation of QE smoother.

Downside risks from the UK referendum will also be high on the agenda.

Back in the UK, based on new data on tax revenues and spending up to the end of June, the Office for Budget Responsibility has warned that, even before the referendum

there is already some evidence that growth in PAYE [income tax], National Insurance contributions and stamp duty land tax (SDLT) was slower in the first three months of the year than would be required to meet our March forecast for the year as a whole.

Luke Hickmore, fixed income senior investment manager at Aberdeen Asset Management, notes that the ECB is following other central banks in sitting on its hands this month. Central bankers are waiting for more evidence on how the UK’s vote to leave the EU might affect their economies. But Mr Hickmore warns

The trouble is that there’s not much more that they can do and it wouldn’t make a huge amount of difference if they did it.

[Mario Draghi's] two main options are to buy more peripheral country debt or allow purchases below the deposit rate. The former carries inherently greater risks and the latter would lock in some long term losses. Expect Mario Draghi to outline some of the options available in the press conference.

Jennifer McKeown of Capital Economics says she expects Mr Draghi to use the upcoming press conference to hint strongly at imminent policy loosening.

Draghi is now up.

Following the Brexit vote, markets have “weathered the spike in uncertainty and volatility with encouraging resilience”, Mr Draghi says.

The ECB is still expecting the eurozone economic recovery to continue and inflation to rise he says.

He reiterates that they will watch the markets closely, and will use “all instruments within its mandate” if required.

“We continue to expect the economic recovery to proceed at a moderate pace,” he says.

Domestic demand is being supported by the pass through of monetary policy to the real economy, he says.

The UK vote to Leave though is a “headwind”, Mr Draghi says. But he points out that it is not the only risk for the Eurozone and there are other geopolitical risks.

“Risks to the Euro-area outlook remain tilted to the downside.”

Draghi highlighted downside risks to the eurozone from Brexit, subdued growth in emerging markets, the requirement for balance sheet adjustments in some sectors and the sluggish pace of structural changes in some countries.

So far the phrase that will grab all the attention is that markets have weathered the Brexit vote with “encouraging resilience”. In other words, there has not been widespread contagion.

Draghi is now back on his familiar refrain of the need for more structural reform. No surprises there.

And we are now time for questions.

Claire Jones, the FT’s Frankfurt Bureau Chief, asks Draghi whether the council discussed relaxing the rules for government bond purchases. But Mario Draghi said that any decisions would be delayed until more information was available on what action was required.

And now, another hot button topic: support for Italian banks. Its a difficult one for Draghi considering he used to head up the Italian central bank.

The question of non-performing loans “is a complex problem”, Mr Draghi says.

Draghi’s full opening statement is now up here

Roger Blitz, the FT’s currency correspondent has his eye on the markets.

The euro has been pretty docile, barely moving as the statement came out, rising around a third of a per cent during the press conference. Since the start of the week, the euro is flat – the FX market has its attention elsewhere, specifically the dollar and the Fed meeting

Draghi says that Brexit does not seem to have had a measurable impact on the eurozone inflation outlook so far.

He refused to be drawn on whether observers are running ahead of themselves by assuming it was a question of when and how much – not if – the ECB would act in the coming months.

But he stressed that they would consider “all instruments within [the ECB's] mandate”.

Now onto the importance of the banks – who’s shares were hit hardest by the fallout from Brexit.

Draghi notes that bank share prices are of “some significance” to monetary policy makers. When the banks with the most non-performing loans are hit, Mr Draghi suggests it could be a signal of possible signal of more conservative lending behaviour around the corner.

That matters for monetary policy, in terms of how it will be translated to the real economy.

He stresses though that the eurozone banks are “much better” than they were before in terms of solvency.

The problem now is the lack of profitability for banks, not a question of their solvency.

The latest European bank stress tests are published on 29 July.

Draghi says we should take estimates of the Brexit impact with a “grain of caution”, stressing that there is a lot of uncertainty – including over how long the negotiations will take and what the final outcome is.

But he stressed that financial markets and the economy have reacted in a resilient way so far, helped by support for liquidity provided by central banks.

One key line from Draghi on the question of non-performing loans is:

We want to avoid firesales

Is this a hint of a possible central bank backstop?

When asked if the ECB would consider altering any of the parameters of their asset purchase programme, Mr Draghi pointed to the fact that in the past they have shown their willingness to adapt the programme in order to achieve the objective for total asset purchases.

Proper attention should be given to…our ability to exploit the flexibility that the design of our programme gives us.

As a sign of how little Draghi is giving up, the questioning has now turned onto estimates of how big the output gap is. To which there is no clear answer given. Unsurprisingly, there are uncertainties.

Mario Draghi refused to comment either way on whether the decision by the European Commission to sanction Spain and Portugal for failing to comply with their deficit targets was counterproductive.

The Commission has the “responsibility, power and knowledge to take the decision,” he said.

Looking ahead to the G20 meeting: What message does Draghi want to send?

“A message of stability” Draghi says.

“It will be a message of a recovery that continues, though at a slower pace, in the midst of great uncertainties.”

“The financial and banking system are stronger than before… it is very important a message like that comes out”

Draghi said that it is difficult to know how big geopolitical uncertainties, like the crisis in Turkey, will affect the eurozone recovery because the channels through which it might have effects are not obvious.

All these events might affect confidence but it is difficult to envisage a significant effect on eurozone recovery at least in the immediate future.

Draghi hinted that there might be a case for changing the ECB’s formal role within the Troika appointed to help restructure countries’ debt.

He said that, while it had made sense to involve all of the IMF, ECB and European Commission in the early stages, over time the ECB’s role has become more focused – specifically on the financial and banking sectors.

But he said that changing the structure of the Troika would require changing legislation and that was not the ECB’s role.

Is the ECB happy with the results of its corporate bond buying process?

As the FT reported earlier, prices of European corporate bonds have risen since the ECB announced in March it would begin to buy them. In what may be a sign of the effectiveness of the programme so far, the price of bonds purchased have risen further.

Draghi answers the question in the terms of whether inflation is rising:

“We are moving forward at the pace that was expected,” he says.

Draghi then widens the question to stress he believes that the monetary policy mix is working, pointing to rising credit availability.

Banks tell the ECB that competition is now the main driver in increasing lending.

“Fragmentation in bank lending in the euro area is by and large over”, he says. Adding that lending spreads have narrowed.

Mr Draghi firmed up his earlier comments on whether there should be a public backstop to prevent firesales, saying

A public backstop is a measure that would be very useful but it should be agreed with the Commission, according to the existing rules.

Should the European Banking Authority be moved from London to Frankfurt?

“I have no specific view on that” Draghi says, skirting the issue neatly.

Countries around Europe are vying to host the agency which is expected to move post Brexit. However, the regulator is locked into a £1.8m-a-year lease on a Canary Wharf tower until the end of 2020, meaning that its early departure will leave the EBA on the hook for the Docklands offices.

Madrid begins land-grab for London-based EU agencies

Europe’s banking watchdog set for costly HQ exit on Brexit vote

Challenged about the withdrawal of the 500 Euro note, Mr Draghi said

We decided the 500 euro note is a good instrument in hands that are not exactly proper hands. As someone said, “we don’t want to draw seignorage from comfort to criminals.”

But he stressed that the existing notes would continue to be legal tender.

Dan McCrum reports that a “general shrug” might be the best way to describe market reaction to Mr Draghi today.

Some small movements in the meantime, but overall European stock prices and bond yields are little changed from their positions late morning, before the ECB statement landed.

Mr Draghi is asked – again – whether there is any conflict of interest in his son being “a bond trader in London”.

He’s not a bank dealer, he’s a trader in London – it’s not a conflict of interest.

This is a question that was discussed and set aside before Mr Draghi was appointed five years ago.

However there has been a big movement in bank shares.

FastFT reports that Draghi’s suggestion that the eurozone’s financial system may need a “public backstop” for rescuing struggling banks has sent lenders’ shares soaring.

Italy – seen as the most vulnerable part of the eurozone’s banking system – has seen its main bank index rise 1.3 per cent on the comments. The country’s most systemically important bank, UniCredit is up 3.3 per cent.

European bank stocks soar on Draghi public rescue hopes

So that’s it for the press conference. A summary is on its way.

Mr Draghi was unwilling today to be drawn into speculation about whether and how the ECB might alter the parameters of their asset purchase programme. Though many journalists tried, he repeatedly referred back to the original written statement from the Governing Council that “the monthly asset purchases of €80 billion 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 apparently calm response of markets and economic activity since the Brexit vote has allowed the ECB time to wait and see what further action might be required.

More significant were Mr Draghi’s hints that the eurozone’s financial system might provide a “public backstop” to prevent the firesale of bank shares amid concerns about non-performing loans.

He said any such intervention would also require agreement from the European Commission. But, even so, the share prices of Italian bank rallied on the news.

Tim Graf, head of macro strategy for Europe at State Street Global Markets

We were a bit surprised by the relatively upbeat take on current events and their impact on inflation and inflation expectations. While we think they will stand pat on major innovations for now, as previously announced programmes unfold, we suspect the need to ease may emerge later this year.

Tomas Holinka, economist at Moody’s Analytics

The immediate risk of financial market contagion after the U.K. vote has subsided, but an economic slowdown in the euro zone is still likely…subdued inflation remains a headache for the central bank…The ECB’s ultra-accommodative monetary policy hasn’t boosted lending or inflation expectations yet. Inflation expectations have fallen further since March, when the ECB announced the last easing package…Below-target inflation until 2019 will force the ECB to keep the main refinancing rate at zero in the three-year horizon, while extending the deadline or winding down asset purchases, rather than cutting the deposit rate deeper into negative territory.

And that’s it for us. For more reaction, keep your eyes on FastFT