ECB Pushes Back Bank Rate Hike Again as Trade War Hits Euro Zone

The European Central Bank again pushed back the date when it will start to consider raising interest rates, effectively acknowledging that the global slowdown largely started by the U.S.-China trade dispute is undermining the Eurozone economy too.

However, the bank chose not to reintroduce the possibility of another interest rate cut into its forward guidance. That raises the likelihood that the euro's interest rate differential with the dollar will narrow in the future, given that the Federal Reserve appears to be pivoting to a looser policy stance.ECB Interest Rate Decision

In a statement, the ECB said that “the Governing Council expects the key ECB interest rates to remain at their present levels at least through the first half of 2020.”

It’s the second straight meeting that the ECB has extended the timeframe for its first hike since 2011. At its last meeting, it had pushed out the timing from September to the end of 2019. The new stance means that whoever replaces Mario Draghi as president of the ECB in November will find it near impossible to move the bank's interest rates for at least eight months.

"The biggest news for markets is not that the ECB won't hike, but that the ECB won't *cut* rates over the next 12 months," said Pictet Asset Management economic Frederik Ducrozet.

In addition, the bank said it would price its new round of “Targeted Long-Term Refinancing Operations”, or TLTROs, which begins in September, at as little as 10 basis points over its deposit rate, which is currently at -0.40%. The precise rate will vary, depending on how much banks lend on to companies and households.

The euro reacted by rising around one-third of a cent against the dollar, hitting an intra-day high of $1.1271, while the yield on the benchmark German 10-year government bond rose by 2 basis points to -0.21%, having been close to a new all-time low immediately before the decision.

"ECB forward guidance change was the big underpriced risk today and it has now materialized," said Lena Komileva, chief executive of G+ economics."Political risk has become the main driver of the international monetary cycle as Q2 draws to a close."

As expected, the ECB left its official interest rates all unchanged. The deposit rate has been at -0.4% and the key refinancing rate has been at 0% since March 2016.

President Mario Draghi will expand on the decision at his press conference, which begins at 8.30 AM ET (1230 GMT).

Draghi is also due to unveil the ECB’s updated forecasts for growth and inflation for the next two years.