ECB to Hold Rates Until Mid-2020 -- 3rd Update

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06/06/2019 | 12:56 pm


By Tom Fairless



VILNIUS, Lithuania -- The European Central Bank left interest rates unchanged and offered no hint yet of a future cut, a contrast to recent easing signals from the Federal Reserve and rate reductions in Asia.



In a nod to the recent erosion in the global economic outlook, the ECB extended the time frame before any rate increase to the middle of 2020 from the end of this year.



In a statement on Thursday, the ECB said it would hold its key policy rate at the current level of minus 0.4% at least through to the middle of next year and continue to reinvest maturing bonds in its EUR2.6 trillion ($2.9 trillion) debt portfolio. It announced generous terms for fresh long-term loans to banks starting in September.



The euro rose after the ECB announced its decision.



Investors will now turn to ECB President Mario Draghi's news conference at 08:30 ET for clues as to how the central bank might react to a prolonged period of economic weakness, including possible interest-rate cuts or fresh bond purchases.



Mr. Draghi will unveil fresh staff economic forecasts on Thursday that could show lower growth next year.



The ECB's decision Thursday appears somewhat at odds with other central banks that have either lowered interest rates or have put reductions on the table. Concerns about the global economy have intensified in recent weeks as trade tensions have mounted. Global bond yields have tumbled, suggesting investors are betting on easier monetary policy, while falling oil prices suggest inflation could fall further below the 2% annual rate that many central banks deem optimal.



Federal Reserve officials have indicated they could lower interest rates if the economic outlook worsens. A growing chorus of central banks in developed and emerging economies has already taken this step.



India's central bank on Thursday cut its key lending rate for the third time this year. On Tuesday, the Reserve Bank of Australia lowered its benchmark rate. Other central banks in the Asia-Pacific region including New Zealand, Malaysia and the Philippines have reduced interest rates in recent weeks. China's central bank has taken steps to encourage more bank lending to small businesses.



The global slowdown is a big problem for Europe, whose economy is heavily geared toward exports. Growth in Germany, the region's manufacturing powerhouse, stalled late last year amid weak demand from economies like China and the U.K., which has yet to agree on terms for its divorce from the European Union.



To counter the threat, the ECB rolled out fresh stimulus in March, pushing back the timing of an interest-rate hike -- which was further extended Thursday -- and unveiling a new batch of cheap long-term loans for banks.



ECB officials have been holding out for an economic rebound in the second half of the year, hoping that foreign headwinds would fade. Instead, the outlook appears to be darkening. Recent business surveys suggest eurozone growth may have halved in the second quarter from the first. Germany's jobless rate rose in May for the first time in five years.



Eurozone inflation has also slumped, falling to 1.2% in May from 1.7% the previous month, some way from the ECB's target of just below 2%.



Write to Tom Fairless at tom.fairless@wsj.com





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