ECB leaves interest rates unchanged as expected

European Central Bank president Mario Draghi said it was too early to assess the impact of Britain’s vote to leave the EU on the euro zone’s economic recovery.

Speaking after the ECB opted to keep its interest rates and stimulus unchanged, he said the ECB’s accommodative monetary policy and central banks’ pledges to provide liquidity had helped “keep market stress contained” after the vote.

"Following the UK referendum on EU membership our assessment is that euro area financial markets have weathered the spike in uncertainty and volatility with encouraging resilience," Mr Draghi said.

The ECB left interest rates unchanged, a decision that was widely expected. The rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility currently stand as 0 per cent, 0.25 per cent and -0.40 per cent respectively.

The governing council of the bank also confirmed the monthly asset purchases of €80 billion are intended to run until the end of next March, or beyond if necessary.

The ECB cut its deposit rate deeper into negative territory in March, expanded its asset buys and offered a fresh round of cheap loans.

Italy’s bank troubles, Britain’s decision to leave the EU and a scarcity of bonds to buy in its asset-purchase programme may all require some action, dashing Mr Draghi’s hopes that the bank was done after years of extraordinary stimulus measures.

The ECB is buying €1.74 trillion worth of assets to cut borrowing costs, induce spending, lift growth and ultimately raise inflation, which has been stuck either side of zero for the past two years.

Brexit may be the biggest single problem, threatening to thwart a modest investment and consumption-led recovery.

Yet the ECB does not have enough information to work with. Early data, such as Germany’s ZEW sentiment indicator and euro zone consumer confidence figures, suggest a significant drop in confidence. Yet such surveys are prone to sharp swings, and the ECB would need a larger body of evidence to act.

Indeed, while analysts polled by Reuters cut their 2017 euro zone growth forecasts to 1.3 per cent from 1.6 per cent, they left their inflation projection unchanged at 1.3 per cent, a mixed reading for the ECB, which targets inflation at just below 2 per cent.

With interest rates deep in negative territory and asset buys running at €80 billion per month, the ECB is running short of tools, raising the threshold for any further move if the bank is to preserve some firepower for any future shock.

Yet some policy changes are still likely in the coming months because the ECB is running out of qualified assets to buy, particularly Germany government debt, as yields fall below its -0.4 deposit rate, a self-imposed limit for its buys.

The dilemma will be whether to tweak the scheme, making just technical changes, or enact a broader but more controversial shift that could fundamentally alter the nature of the ECB’s quantitative easing.