The European Central Bank kept policy unchanged by maintaining a series of stimulus measures as the Eurozone’s economy is decelerating. These include a -0.4% deposit rate, and the main refinancing rate stands at zero.
“The Governing Council expects the key ECB interest rates to remain at their present levels at least through the end of 2019, and in any case for as long as necessary,” the statement reads.
Weak demand has disrupted the Eurozone’s export-led recovery in Germany, Italy, and France. Meanwhile, business confidence is suffering amid a Sino-American trade war, weaker Chinese growth, and the threat of a disorderly Brexit. US President Donald J. Trump has also threatened the EU with tariffs on $11 billion worth of European Union products.
The ECB has so far not moved to compensate banks for the prolonged period of negative deposit rates, but the board is said to be considering a tiered deposit rate that would partially shield lenders from part of the cost, as is the case in Switzerland and Japan.
Radical policy changes were unlikely as the ECB expects a change of the guard in October when the terms of both President Mario Draghi and the bank’s chief economist, Peter Praet, come to an end.
In theory, negative interest rates are meant to push banks to lend. However, according to a published ECB, the bank’s lenders are reporting a drop in demand for credit. Net loan demand actually shrank in Spain and Italy as companies and households are already heavily indebted.