The European Central Bank (ECB) announced Thursday it has decided to keep its interest rates unchanged. The central bank left its primary interest rate – the cost of borrowing at its conventional loans – at just 0.05 percent. The ECB also kept its deposit rate at -0.2 percent, which forces financial institutions to continue paying for leaving their excess reserves at the central bank.
Now that rates are staying near zero, officials and economists are turning their attention to the ECB’s initiative to purchase assets in order to stimulate the fledgling eurozone economy and boost inflation, which the ECB says stands at 0.3 percent annually, a number that is far below its two percent target rate.
As we reported in September, the ECB is purchasing asset-backed securities and covered bonds as part of its stimulus efforts. With these implemented measures, it is expected the ECB’s balance sheet will skyrocket by $1.23 trillion – a central bank’s balance sheet highlights how accommodative its monetary policies are to spur economic and investment growth.
However, since other central banks have incorporated such monetary tools – the Bank of England and the Bank of Japan, for instance – there are some concerns that it won’t do the trick, considering how sluggish the eurozone economy is. The main debate is to either take a wait-and-see approach or to push ahead with vast purchases of sovereign bonds, an ECB version of the Federal Reserve’s quantitative easing.
“The Governing Council will continue to closely monitor the risks to the outlook for price developments over the medium term,” said ECB governor Mario Draghi in his opening remarks. “In this context, we will focus in particular on the possible repercussions of dampened growth dynamics, geopolitical developments, exchange rate and energy price developments, and the pass-through of our monetary policy measures. We will be particularly vigilant as regards the broader impact of recent oil price developments on medium-term inflation trends in the euro area.”
Speaking in an interview with an Italian newspaper (via Reuters), Fed Vice Chair Stanley Fischer, who ostensibly was Draghi’s academic mentor, encouraged the ECB to turn on the printing press as he believes this would encourage economic growth.
BoE takes the same route
The Bank of England confirmed Thursday it has kept its base interest rate unchanged at 0.5 percent, a record low that hasn’t been revised since Mar. 2009. The central bank decided to keep it at a historic low citing low inflation, eurozone stagnation and modest wage growth.
It will also maintain its bond portfolio at $588 billion.
With official inflation figures remaining below the two percent target rate and economic growth reaching 0.7 percent in the April-to-June period, BoE governor Mark Carney purported they had no other choice but to keep rates at less than a percent.
“It would be a surprise if the Bank of England raised interest rates before the latter months of 2015, especially given the disinflationary pressures coming from very low oil prices. It looks highly improbable that there will be an interest rate hike before the May 2015 general election,” said Howard Archer, chief UK and European economist at IHS Global Insight, in an interview with the London Telegraph.
Bank of Canada maintains interest rates
The Bank of Canada said Wednesday it will maintain its overnight interest rate at one percent, unchanged since Sept. 2010. BOC governor Stephen Poloz warned that falling oil prices and greater household debt levels were threatening Canada’s economic recovery.
Poloz noted that the central had to balance the risks in order to come to a conclusion. Essentially, these record low interest rates will further aid borrowers to increase their debt levels, though a new report released at the same time suggested the nation’s consumer debt level stands at $1.5 trillion.
“While inflation is at a higher starting point relative to the October MPR, weaker oil prices pose an important downside risk to the inflation profile,” said Poloz in a statement. “This is tempered by a stronger U.S. economy, Canadian dollar depreciation, and recent federal fiscal measures. Household imbalances, meanwhile, present a significant risk to financial stability. Overall, the balance of risks remains within the zone for which the current stance of monetary policy is appropriate and therefore the target for the overnight rate remains at 1 per cent.”
Canadians owed $1.63 for every $1 they earned in the third quarter of this year.
