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Bank of England, European Central Bank Keep Rates On Hold as Markets React

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Bank of England, European Central Bank Keep Rates On Hold as Markets React

The Bank of England and the European Central Bank both kept policy on hold this morning as Europe still reels from a third recession since 2007 and England's economy grows ever-so slowly. The European Central Bank also revised its growth and inflation forecasts for 2013 and 2014 in a sign that the recession is not going anywhere, anytime soon.

Bank of England

The Bank of England today kept rates on hold in Governor Mervyn King's last meeting as the head of the bank. "The Bank of England's Monetary Policy Committee today voted to maintain the official Bank Rate paid on commercial bank reserves at 0.5%. The Committee also voted to maintain the stock of asset purchases financed by the issuance of central bank reserves at £375 billion."

The bank has now kept rates on hold at extremely low levels for over four years. Further, the Bank has not expanded its QE program in nearly a year, the last time being at its July, 2012 meeting. Rates have been at 0.5 percent since late-March, 2009, when equity indices bottomed in the financial crisis.

European Central Bank

The European Central Bank also kept rates on hold Thursday morning, although some had been eyeing a cut to the deposit rate. "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 0.50%, 1.00% and 0.00% respectively." The ECB notably cut the main refinancing rate last month from 0.75 percent to 0.5 percent.

President Mario Draghi spoke after the release, noting that the economy seems to be improving very slowly and that the bank refrained from another rate cut as the board wants to see the effects of the previous rate cut play out before cutting rates further. Draghi also noted that the ECB is "technically" ready for negative deposit rates, although the bank did not indicate that it was ready to do so anytime soon.

Forecasts Change

President Draghi also noted that the ECB has altered its forecast for both growth and inflation in 2013 and 2014. For 2013, the ECB downwardly revised its growth forecast to a decline of 0.6 percent from a decline of 0.4 percent in March. Also, the ECB revised upwards its 2014 growth forecast to 1.1 percent growth from 1.0 percent previously. The ECB also cut its inflation forecasts to 1.4 percent and 1.3 percent for 2013 and 2014, respectively.

The drop in the growth forecast was largely expected, as the eurozone economy contracted 0.6 percent in the fourth quarter and the estimates of first quarter reveal a contraction of 0.2 percent in the quarter. Growth is expected to return on a quarterly basis by the end of the year.

Markets React

European stock markets dropped on the news that the ECB was not going to cut the deposit rate and has no intentions of doing so in the near future. After trading positively earlier this morning, the German, French, and English stock markets all dropped into negative territory. Italy's stock market extended losses and saw a wild 10-minute swing at the beginning of Draghi's press conference. The Spanish Ibex was the only major index in Europe to cling to gains after the country's successful bond auction this morning and better than expected PMI and unemployment data earlier this week.

Bond yields for peripheral nations also rose in a vote of disappointment against Draghi. Spanish and Italian 10-year bond yields both climbed about 10 percent after the ECB decided not to cut rates and hinted that cuts may not be coming soon.

The euro climbed on the news as the drop in rate cut expectations boosted the single currency. The euro gained to session highs against the dollar near 1.3170 after the release and press conference. The euro also climbed sharply against the pound, the yen, and the Australian dollar.

 

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